Unravelling the profitability puzzle

Finance Minister Clyde Caruana, in response to a parliamentary question, presented some interesting data on the level of profitability among companies located in Malta.

Based on 2023 data, he highlighted that out of 5,527 companies, 2,960 registered profits of over €100,000, while 824 registered profits of over €500,000, and 1,743 over €1 million. With some 50,595 registered corporate taxpayers, this translates to 11% of companies, with the rest either reporting a loss, breakeven or a profit below €100,000.

By way of comparison, in 2022 some 70% of Maltese enterprises posted tax statements showing that they broke even or registered a loss. And up to 60% registered a loss or breakeven in 2019. 

When weighing in on these numbers, one cannot ignore the fact that most companies are classified as SMEs, if not micro-sized. Likewise, despite the government’s repeated claims on its effective clampdown on tax dodgers, one must also recognise the reality that some companies will have two sets of books.

In gauging profitability levels, one must also take into consideration the elevated inflationary pressure and supply chain disruption experienced over the past years along with the ongoing escalation in competition and resultant margin compression within various sectors.

Of relevance when taking a broader perspective is that corporate tax within the EU averages 21.5%. Malta’s rate of 35% tops the corporate tax table across the EU, followed by Portugal, Germany, and Italy at 30.5%, 29.9% and 27.8% respectively. Hungary at 9%, Bulgaria at 10% and Ireland along with Cyprus, both at 12.5%, sit on the bottom end of the table.

Locally, some companies benefit from investment tax credits, and out of the 50,595 companies, circa 8,000 enjoy Malta’s low effective corporate tax rate of five per cent, with all the rest being subject to the standard 35%.

Taking a glance at Eurostat data, comparing government’s corporate tax revenue as a percentage of GDP over the past years shows that this varied from 5.7% to 6% between 2012 to 2017, peaking at 6% of GDP in 2016, with 2023 registering a low 4.2%.

While acknowledging that GDP has over these years increased beyond comparison, it is noteworthy to highlight that profitability levels within many companies do not reflect our strong economic growth.

One can understandably expect differing views on how to interpret these profitability levels, but what is certain is that the finance minister’s responding statement deserves deeper analysis to unravel the profitability puzzle and help us better understand the general state of play within the local corporate environment.

The data presented puts into question the organisational set-ups, cost structures, ways of working, along with considerations on operational efficiency and scale within companies.

Some companies will have two sets of books

Indeed, it is not uncommon to hear companies lamenting on the unsustainable level of competition together with rapidly rising costs and an eroding bottom line.

The excessive fragmentation of some sectors, apart from operating within a limited domestic market, is rendering several companies highly uncompetitive, with assets either heavily under-utilised due to oversupply, or conversely under-resourced due to years of investment neglect. 

Many companies remain vulnerably exposed to market pressures with a resultant compelling need of revisiting their business models. These may extend from corporate or operational transformation considerations to possibly even shareholding structure.

Market dynamics are increasingly challenging the status quo and dictating that companies consider reinventing, reshaping and repositioning themselves. Aimed at creating added value and competitive advantage, this could also be driven by a scalable ‘build or buy’ strategy, bringing about beneficial synergies along with some needed market consolidation.

Becoming more a matter of necessity rather than choice, this approach is not simply about seeking to outpace competitors in terms of size, but also about changing the game, by working differently.

It is more about staying updated and relevant, seeking innovative and smarter ways to differentiate, and not simply replicating mainstream thinking. This, also underling the need to elevate the entrepreneurial spirit, while curtailing that occasional sprouting herd mentality.

Having real ambitions for strengthening one’s business requires bold decisions conditioned by the ability of seeing opportunities when others may be seeking refuge, of having the conviction to venture beyond familiarity, of having the audacity to zig when most others zag.

With ever-increasing competitive pressures, companies are compelled to break away from traditional boundaries, particularly those family-owned that may be unable to capitalise on the synergies of balancing out ownership with professional management. 

Challenges are there to be overcome and not overlooked and no company can hold on to a survival modus operandi or rely on yesterday’s solutions.

Today’s realities reflect a different ball game altogether, more often requiring a paradigm shift to ensure the building of more competitive and resilient companies. Adopting a permissively adaptable, forward-looking and strategically focused approach remains a fundamental prerequisite in establishing future proof companies.  

Norman Aquilina is the group chief executive of Simonds Farsons Cisk plc, and a council member of The Malta Chamber of Commerce, Enterprise and Industry.