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FEdERAl
RESERVE
BANk

of
ClEVElANd

ANNUAl
REPORT

197~

FEdERAL

of

RESERVE BANk
CLEVELANd

SiXTY- FiRST ANNUAL
REPORT ANd STATEMENT

To the Member Banks in the Fourth Federal Reserve District:
We are pleased to present the 1975 Annual Report of the Federal Reserve Bank of
Cleveland. This year's report examines the impact of the economic and financial
challenges of the early 1970's on the balance sheets and income statements of large
manufacturing firms in the Fourth District.
The Bank,
in the exercise of its monetary
policy and bank regulatory
responsibilities within the Federal Reserve System, has among its goals the maintenance
of a strong and sound banking system in the Fourth District. The impact of monetary
policy activities affects banks not only by influencing the flow of money and credit in the
economy but also through its effects on financial decisions of households, nonfinancial
firms, and financial institutions. Thus, the Federal Reserve Bank of Cleveland and the
banking community
have an interest in understanding
how monetary policy interacts
with financial decision-making
of these groups. The long-standing
importance
of
manufacturing
activity in the District makes the interaction of monetary policy and
corporate decision-making of special interest, particularly because of the District's heavy
dependence
on durable goods which in other periods contributed
to more severe
recessions and somewhat weaker recoveries here than in· the nation.
Understanding
how national financial and economic conditions affect the District is vitally important.
The 1975 Annual Report highlights the financial behavior of major segments of the
corporate sector of the District during the first half of the decade. The inquiry in this
report focuses on the liquidity, debt structure, and profitability of District manufacturing
firms between 1970 and 1974. It poses many questions about the financial performance
of firms in a period characterized
by expansion and contraction
in economic activity,
sustained inflation, and rapid technological change. Answers to these questions would
contribute
to an understanding
of the interaction of monetary policy and corporate
financial developments. We are concerned with these and other questions and will address
ourselves to some of them in the year ahead.
Finally, we take this opportunity to thank the numerous people, especially member
banks and directors, officers, and the staff of this Bank, who have helped us fulfill our
varied responsibilities
during 1975. We also ask them for their continued assistance in
1976 in accomplishing the many complex tasks with which the Bank is charged.
1

Chairman of the Board

President

A

REViEW

of

of

FOURTIt

CORPORATE

BALANCE SItEETS

Disrnicr MANUFACTURERS
1910-1914

Corporate
balance sheets and income statements
reflected a variety of volatile financial and economic
conditions between 1970 and 1974. Some of the changes
made mirrored
cyclical developments
associated
with
business expansion and contractions.
The brief span of 5
years covered a complete business cycle beginning with
the mild recession in 1970, followed by an expansion
from 1971 to 1973, and ending with the worst recession
since World War II. During this time, firms were also
subjected to accelerating
inflation, alternately tight and
easy credit market conditions,
widely fluctuating stock
prices, and wage-price controls. The resulting buildup in
debt
and erosion
in liquidity
handicapped
many
corporations-bringing
lower credit ratings for some firms
and near bankruptcy for others.
The Federal Reserve Bank of Cleveland is vitally
interested in corporate financial developments
because its
monetary' policy responsibilities may be better carried out
with an understanding
of how business firms adjust their
balance sheets to money and credit conditions.
These
developments
are of particular
interest in the Fourth
District. Manufacturing accounts for about 31 percent of
total employment
in the District; but it also accounts for
most of .the wide fluctuations in income and employment
in the District, because of the volatility of its large durable
goods
component.
How financial conditions
affect
corporate
balance sheets is also important
to ban kers
because banks are frequently a major source of funds for
firms.
This report analyzes balance sheets and income
statements
of firms in the heavily industrialized
Fourth
Federal Reserve District to determine the nature of changes
that occurred between 1970 and 1974) Among the 110
manufacturing
firms headquartered
in the District that are

the subject of this report, 54 are among the top 500 firms
on the Fortune list of largest industrial firms in the United
States and 16 are. among the 100 largest firms. Cleveland
and Pittsburgh, the two largest metropolitan centers in the
District, rank third and seventh, respectively, in the number
of corporate headquarters for the largest industrial firms in
the U. S. Many of the firms are multinational,
with plants
and subsidiaries throughout the world, and foreign sales of
several of the largest firms account for 20 to 30 percent of
their total sales. These large firms represent a cross-section
of industries that includes chemicals, petroleum, rubber and
plastics, primary metals, fabricated metals, nonelectrical
machinery, electrical machinery and transportation,
and
that accounted
for over 70 percent of manufacturing
employment in the District last year.
The analysis shows that manufacturing
firms in the
District did well despite adverse economic and financial
conditions
between 1970 and 1974. Problems that do
surface involve individual firms rather than the aggregate
balance sheet for manufacturers. When viewed against some
commonly accepted measures, reduction in liquidity was
partly a cyclical phenomenon.
Moreover, the buildup of
debt was matched by growth in equity, and manufacturers
were able to improve profit margins.

iBalance sheet data for 1975 are not yet available to indicate how
well manufacturing
firms in the Fourth District restructured
balance
sheets and how well they were able to maintain
profitability.
Financial data used in this report are based on balance sheet and
income statement
data collected by Investors Management Sciences,
Inc., a subsidiary of Standard and Poor's Corporation.
Data covered
110 manufacturing
firms that had sales of $50 million or more in
1972.

Performance Measures
The financial aspects of firms in this study are
evaluated
using
liquidity
ratios,
debt ratios, and
profitability measures.
Liquidity, broadly defined, is the ability of a firm to
meet short-term obligations. How well a firm may do this
can be measured several ways. Each approach provides a
somewhat different
perspective because each relates a
different category of assets to current liabilities. The
current ratio is one measure of liquidity used here, and it
measures the ability of a firm to pay short-term obligations
with assets that are readily convertible to cash. It relates

current
assets,
including cash, marketable
securrtres,
receivables, and inventories, to current liabilities, including
accou nts payable, short-term
notes payable, maturing
long-term obligations, and other miscellaneous liabilities. A
current ratio of 2:1 has long been considered the standard
for an acceptable level of liquidity. Another ratio used here,
the quick ratio, relates the most liquid assets, cash and
Government
securities, to current liabilities. Accounts
receivable and inventories are excluded from this ratio
because neither is necessarily convertible into cash on short
notice without losses.

3

Debt ratios measure a firm's leverage, i.e., the amount
of firm financing through debt. Increased leverage can make
a firm more susceptible
to financial risks during both
recessions and tight credit market conditions.
A highly
leveraged firm may have difficulty covering interest costs
and other fixed charges when earnings decline. A high
debt-equity ratio during tight credit market conditions may
make it difficult for a firm to increase borrowing until more
capital is provided through equity markets or retained
earnings. A firm that does not have access to debt markets
or decides not to add more debt for investment may decide
to lease property or equipment. This alternative to debt
financing
allows the firm to acquire assets without
necessarily
adding
to its debt structure.
Therefore,
debt-equity ratios for firms that use leasing could be higher
than reported if leases were capitalized in the same manner
as an investment in fixed assets. Under most leases, a firm
neither adds to fixed investment nor to long-term debt, and
can allocate its limited resources more fully to working
capital needs.
Although
analysts have expressed .concern
over
business
liquidity
in recent years, investors tend to
emphasize profitability when measuring how well a firm is
managed. Therefore, profitability
is used in this report to
evaluate overall firm performance from 1970 to 1974. The
two measures used are return on sales (net profit after taxes
as a percent of sales) and return on net worth (net profit

after taxes as a percent of net worth). Rates of return on
sales and net worth are the product of many factors,
inc Iud i n g management
goals, market structure
of an
industry,
growth and stability of sales, and cost-price
relationships. As a result, they differ widely among firms
within an industry as well as between industries.
This report analyzes the financial aspects not only of
the group of 110 manufacturing firms as a whole, but also
of these manufacturers
by industry, by size, and by sales
growth rates. These three factors can cause an individual
firm's liquidity ratios and debt structure
to vary from
overall manufacturing
averages for several reasons. For
example, one firm may require larger amounts of financing
than another if it is in a more capital intensive industry
than the other. If the firm is in a fast growing industry, it
may be able to rely more on internal financing than if it is
in a slow growing, cyclical industry. If it is a large firm with
high earnings, it may have greater access to money, capital,
and equity markets than if it is a small firm. If the firm has
fast growing sales, it may have greater needs for financing
for expansion than if it is a slow growing firm, but it also
may be better able to attract investors willing to pay a
premium for its stock because of its growth and earnings
potential. Thus, analysis of firms in different industries, of
different sizes, and with different growth rates can help
determine the pervasiveness of financial changes and differences in financial characteristics among various groups.

Developments in Balance Sheets and Earnings
Co rporate finance between
marked by two major developments:
•

•

4

1970

and

1974

was

The period opened with the liquidity position
of manufacturers
already eroded by heavy
short-term financing and the consequent need
to restructure
debt and rebuild liquid assets.
The period
closed
with
liquidity
and
debt-equity
relationships
under pressure as a
result of heavy debt financing to meet soaring
demands for capital equipment and inventory
investment.
Manufacturers
generally maintained
profit
margins and raised rates of return on equity
through the period, but at a slightly lower level
than in the prior 5 years. Return on equity and
on sales averaged 11.0 percent and 4.8 percent,
respectively,
between
1970
and 1974;
compared to an average of 11.9 percentand
6.2
percent, respectively, between 1965 and 1969.
However, profits and retained earnings were
not generated fast enough to support working
capital needs as the expansion accelerated in
1973.
Heavy debt-service
charges, illusory
profits
from
inventories
and inadequate

depreciation
charges constrained
internally
generated funds and forced firms into another
wave of debt financing in 1974.

Liquidity
Liquidity ratios fluctuate
with the business cycle.
When an economic expansion begins, liquidity is rebuilt as
profits increase and current assets, especially cash and
securities, expand more rapidly than short-term debt and
other current liabilities. As the expansion progresses, liquid
assets rise slowly or are run down as demands strengthen to
finance receivables, inventories and fixed assets. Short-term
debt builds rapidly after the expansion is well underway.
Liquidity weakens in the latter stages of expansion and
continues to slide until late in a recession. In addition to
this cyclical behavior, liquidity ratios have followed a
long-term declining trend, as businesses have learned to
manage cash balances more efficiently and to resort to
short-term financing to provide funds.
Behavior of liquidity ratios for manufacturing firms
in the District from 1970 to 1974 roughly paralleled both
the cyclical pattern and the long-term trend. During the
recession in 1970, current assets exceeded current liabilities
somewhat
more than the 2:1 norm. Nevertheless, the
current ratio was at a low, reflecting both cyclical and

Selected Financial Ratios of Fourth District Manufacturing

Firms

1970-1974
Current
2.3

Long-Term

Ratio

r---::;;::::::=:--------,

Debt/Equity

Percent
53

2.2

52

2.1

51

2.0

50

1.9

49

1.8

r--------------------.....,

48
0
1970

'71

'72

'73

'74

'71

'72

'73

'74

'71

'72

'73

'74

'71

'72

'73

'74

Return on Equity

Quick Ratio

Percent
14

0.4 ,-------------------.....,
0.3

1970

~~--------

13

0.2

12

0.1

11

1970

'71
Source:

'72

'73

'74

Federal Reserve Bank of Cleveland and
Investors Management Science, Inc.

long-term influences. During 1971 and 1972, the District's
economy
was recovering
from
the recession and
manufacturers
rebuilt liquidity.
Treasurers
built their
current assets, especially cash and liquid assets, more
rapidly than short-term debt. At yearend 1972, liquidity
measures were well above the low 2 years earlier. In 1973
and 1974, liquidity was squeezed as liquid assets were run
down and short term credit expanded to finance soaring
demand for inventories and capital spending. Corporate
treasurers financed the bulk of their needs with short-term
funds, mainly bank loans and commercial paper, expecting
record borrowing rates to decline. Equity financing was not
an attractive source of funds because of depressed stock
prices. Also, long-term debt financing, especially in the
bond market, was hindered because investors preferred
the highest quality securities and because businesses were
reluctant to issue debt when interest rates were high. At the
end of 1974, the current ratio was well below the previous
low in 1970, although the quick ratio holdings of liquid
assets relative to current liabilities was higher than in 1970
(see charts on page 5).

10
9

-s0
1970

Profit Margins
Percent
6
5
4
0
1970

Debt Structure
Business firms have become increasingly dependent
on borrowed funds in recent years, making huge demands
on capital markets. Debt financing reflected inadequate
profits and internal cash flows relative to capital investment
and inventory
investment
program
requirements.

5

Inadequate
internal funds partly reflected the rampant
inflation
in the cost of doing business that drained
corporate liquidity in recent years, especially in 1973 and
1974. In addition, inflation tended to overstate corporate
profits which boosted taxes at a time when higher costs of
new facilities increased the volume of funds needed for
replacement. With equity prices at unattractive
levels and
tax advantages from debt financing, business firms rei ied
heavily on debt financing. The sharp buildup in debt also
strained the liquidity of many firms because much of the
borrowing was concentrated in short-term markets.
As a result, manufacturing
firms in the Fourth
District acquired large amounts of debt between 1970 and
1974, but long-term debt relative to equity was at the same
proportion at the end of 1974 as it was at the end of 1970.
Apparently,
manufacturers
refunded some· portion of the
short-term debt acquired in 1970, reduced the proportion
of debt to equity in 1972 and 1973, and then added debt
more rapidly than equity in 1974. Looking at individual
firms rather than aggregate data, 13 manufacturers
had
more long-term debt than equity in both 1970 and 1974.
Profitability
Manufacturers
in the District successfully improved
profit margins between 1972 and 1974 and considerably
improved return on equity during the 5-year period. Return
on equity improved from 9.2 percent in 1970 to 14 percent
in 1974, as net income of Fourth District firms nearly
doubled in response to a higher volume of sales and higher
prices.
The upward movement in profitability paralleled but
fell somewhat
short of the gains experienced
by all
manufacturing
corporations in the U. 5.2 Moreover, a large

part of the reported gains in earnings in recent years were
illusory because high rates of inflation overstated profits
from inventories. Many manufacturers in the District used a
first-in/first-out
method of accounting
that includes
cost-of-goods-sold
at historic costs instead of replacement
costs; therefore, large profits from inventories were realized
during this period of sharp increases in costs and prices.
These profit gains were illusory because inventories had to
be replaced at current higher costs. In 1974, for example,
nearly 37 percent of total reported profits of nonfinancial
corporations
in the U. S. were inventory gains. If earnings
of manufacturers in the District were adjusted for inventory
profits
in the same proportion
as for nonfinancial
corporations
in the U.S.,
net income of the 110
manufacturers
in 1974 would have fallen 3 percent from
the previous year rather than increased by 23 percent. For
1970 to 1974, net income would have risen 22.5 percent
after allowance for inventory gains, rather than nearly
doubling.
Similarly, depreciation allowances in an inflationary
period tend to overstate profits. Charges for depreciation
are inadequate because of higher replacement costs, wh ich
are only
partly
compensated
for by accelerated
depreciation allowances.
In summary, relatively slow growth in earnings after
inventory profits from 1970 to 1974, and an outright
decline in 1974, squeezed liquidity and fostered reliance on
external sources of funds to finance soaring demands for
current and fixed assets.
2For all manufacturing
corporations
in the United States, profit
margins averaged 4 cents per dollar of sales in 1970 and 5.5 cents in
1974. Return on equity amounted
to 9.3 percent and 14.9 percent,
respectively.

Industry Differences and Behavior
Liquidity ratios and debt structure within an industry
may vary widely from the overall developments reported
above. These variances reflect differences
in product,
market structure, growth and stability of sales, and the
ability to raise financing in the money, capital and equity
. markets. For instance, firms more capital intensive than
others may require larger amounts of financing from both
internal and external sources. Firms with fast growing sales
and high returns on investment can depend more heavily on
internal financing. Other firms with slower growing sales
and- insufficient depreciation allowances to meet their needs
for fixed assets may depend more on external financing.
The stability and growth of sales within an industry also
affect its means of financing.
Firms whose sales and
earnings are highly cyclical and slow growing, such as steel
firms, may have difficulty interesting investors in equity
financing. Firms with stable and rapidly growing sales, such
as chemical firms, can rely more on equity markets for
financing expanding needs.
To help determine
the pervasiveness of financial
changes as well as differences in financial characteristics

6

among various industries, eight groups of manufacturers
are considered,
including chemicals, petroleum,
rubber
and plastics, primary metals, fabricated metals, machinery,
electrical machinery and equipment,
and transportation
equipment. Firms in these industries account for 71 percent
of the firms included in this report and for about the same
proportion of employment
in manufacturing in the District
last year.
All industries,
except electrical machinery
and
equipment, had lower current ratios in 1974 than in 1970,
and most industries had more debt relative to equity in
1974 than in 1970. Firms in the chemical industry had the
lowest debt relative to equity and the best returns on sales
and equity. Firms in the machinery industry were the
lowest earners and had the highest debt to equity of any
industry (see charts on page 7).
Liquidity
The cyclical nature of liquidity is suggested by the
behavior of liquidity ratios for the various industries during

Current

Quick Ratio

Ratio

3.0

0.7 ------------------------------------------0.6

2.0

0.5
0.4

1.0

0.3

o

'70 '74 '70 '74 '70 '74 '70 '74
12345678

'70 '74 '70 '74 '70 '74

'70 '74

0.2
0.1

o

Selected Financial Ratios of Fourth District
Manufacturing Firms by Major Industries

'70 '74 '70 '74 '70 '74
5
6
7

'70 '74
8

'70 '74 '70 '74 '70 '74 '70 '74

'70 '74

No. of Firms

Industry
1.
2.
3.
4.
5.
6.
7.
8.

'70 '74 '70 '74 '70 '74 '70 '74
.1
2
3
4

Chemicals and Allied Products
Petroleum
Rubber and Plastics
Primary Metals
Fabricated Metals
Nonelectrical Machinery
Electrical Machinery
Transportation
Source:

8
6
8
14
5
15
8
14

Federal Reserve Bank of Clevelandand
Investors Management Science, Inc.

Long-Term

Debt/Equity

Percent
70----------------~-----------------------

40 -----

30
.-;/

o

Return on Equity

'70 '74 '70 '74 '70 '74
2345678

Percent
18-------------------------------------------

16

Profit Margins
Percent

9-------------------------------------------

14

12
6

10

5
8

4
3

6

2
4
.-;/

o

'70 '74 '70 '74 '70 '74 '70 '74 '70 '74 '70 '74 '70 '74
12345678

'70 '74

o

'70 '74 '70 '74 '70 '74
12345678

'70 '74 '70 '74 '70 '74 '70 '74

'70 '74

7

the period. From lows, generally in 1970, liquidity ratios
rose in 1971 and 1972 and then fell to new lows in 1974.
The decline in both current and quick ratios was most
pronounced
in the chemical,
fabricated
metals, and
nonelectrical
machinery industries. Several firms in these
industries held fewer liquid assets in 1974 than in 1970 and
1971. They has also added substantially to short-term debt
to finance soaring demand for inventories and capital
equipment.
Primary metals producers, especially steel, held a
higher proportion
of liquid assets to current liabilities in
1973 and 1974 as a result of high earnings in those years.
Nevertheless,
some deterioration
in their current ratio
occurred as working capital and fixed capital needs rose
sharply.

Debt Structure
Five of the eight industries held more debt relative to
equity
in 1974 than in 1970. Two capital intensive
industries, petroleum
and primary metals, reduced their
long-term debt relative to equity. Most primary metal
producers
reduced the proportion
of debt to equity
between 1970 and 1974. Steel companies improved their
debt-equity
relationship as a result of improved earnings

from a high volume of steel operations and substantial price
increases following wage-price decontrol
in April 1974.
They also stepped up modernization
and expansion of
facilities in 1973 and 1974. Producers of chemicals and
allied products, another capital intensive industry, held the
lowest amount of debt relative to equity of any of the eight
industries.

Profitability
Manufacturers
generally were able to improve their
,return
on equity between 1970 and 1974, but not all
improved their profit margins. Profit margins generally
peaked in 1973 but then dropped as a result of lower sales
volume and higher costs that were not recoverable in some
industries, such as rubber and automotive, because of weak
market conditions.
Ra tes of return on sales and on equity varied
considerably
between the highest and lowest earners. In
1974, profit margins ranged from a low of 2.6 cents per
dollar of sales in electrical machinery to a high of 6.7 cents
per dollar in chemical and allied products and from a low of
8.8 percent return on equity in fabricated metals to a high
of 17.7 percent in chemicals. Return on equity in 1974 was
higher than in 1970 for all industries except fabricated
metals and electrical equipment.

Size Differences and Behavior
Different size firms may also have liquidity ratios and
debt
structures
that
vary widely from the overall
developments
discussed earlier. These variances reflect
firms' different financial needs and abilities to finance those
needs. For instance, smaller firms are typically
more
conservatively managed and may have less access to debt
and equity markets than larger firms. Larger firms generate
stronger cash flows but frequently not enough to permit
modernization
and expansion of capacity. Thus, larger
firms typically need external financing, particularly for
fixed assets. Working capital needs also vary among smaller
and larger firms. Smaller firms depend heavily on current
asset management, and trade credit is an important source
of external financing for them. Larger firms with higher
earnings have access to a variety of debt and equity sources
and resort to external financing to meet both working
capital and fixed asset needs.
To determine
how changes in financial markets
affected different size firms, the 110 manufacturing firms
are classified into four groups based on 1970 sales. These
classifications are: firms from $50-$100 million in sales;
firms from $100-$500 million; firms from $500 million to
$1 billion; and firms with sales of more than $1 billion.
Balance sheet and income performance between 1970
and 1974 was substantially
different for large and small
firms. In 1974, the largest firms in the District ($1 billion
and over) held lower current ratios, higher debt-equity
ratios, and higher returns on sales and equity than the

8

smallest firms ($100 million or less). Firms with sales
between
$500 million and $1 billion were the most
profitable (see charts on page 9).

Liquidity
Both liquidity measures followed the cyclical pattern
described earlier. Both ratios peaked in 1971 and slid
gradually to lows in 1974. Firms in all size classes reduced
holdings of current assets relative to current liabilities
between 1970 and 1974, but the largest reduction occurred
for firms in size classes $100/$500 million and $1 billion
and over. Firms in the smallest size group were the most
liquid, and the largest firms the least liquid.

Debt Structure
Smallest firms held the lowest proportion of debt to
equity of any of the four groups. Firms in the $500
million/$1
billion size class were the only group that
consistently added more debt than equity between 1970 to
1974, and they were also the group with the highest
proportion of debt to equity. For other size classes, debt to
equ ity was generally lower in 1974 than in 1970.

Profitability
Manufacturers in all size classes earned a higher return
on equity in 1974 than in 1970, and a return on sales that
was nearly the same or better in 1974 than in 1970.

.Current Ratio

Quick Ratio

3.0------------------------------------------

0.4 ---------------------

2.0

1.0

o

'70

'74

'70

'74

'70

2

'74

'70

3

'74
4

'74

Selected

No. of Firms

$50 Million to $100 Million
$100 Million to $500 Million
$500 Million to $1 Billion
$1 Billion and Over

'74

'70

40
43
11
16

'74

'74

'70

3

2

Financial Ratios of Fourth District
Manufacturing
Firms by Size

Size
1.
2.
3.
4.

'70

4

Long-Term Debt/Equity
Percent
70
60
50

Source:

Federal Reserve Bank of Cleveland and
Investors Management Science, Inc.

40
30

.c;::-

O

'70

'74

'70

'74

'70

2

Return on Equity

'74

'70

'74
4

3

Percent
17

Profit Margi ns

15

Percent
6

13
5
11

9

7

5

.c;::-

O '70

'74

'70

'74
2

'70

'74
3

'70

'74
4

'70

'74

'70

'74
2

'70

'74
3

'70

'74
4

9

Nevertheless, margins in 1974 were lower than in 1973 for
firms in all size classes except in the $500 million/$l billion
group. Firms in the largest size class consistently earned the

highest return per dollar of sales, but firms in the $500
million/$l billion class earned the highest return on equity
(1972-1974).

Growth Differences and Behavior
Liquidity ratios and debt structures will also vary
from the overall developments discussed at the beginning of
this report among firms with different rates of growth in
sales. On the one hand, faster growing firms are likely to
have larger working capital needs and maintain lower
liquidity than slower growing firms. This reflects the faster
growing
firms' needs to meet expanding
receivables,
inventories and capacity. Heavier demands for working
capital may cause cash flow problems for faster growing
firms. On the other hand, faster growing firms may have
greater access to both equity and debt financing than
slower growing firms. Faster growing firms attract investors
who are willing to pay some premium for their stock
because of its growth and earnings potential.
To analyze these differences,
the 110 firms are
classified according to their growth rates in sales. Growth
here is defined as a compound annual rate of change in net
sales from 1970 to 1974. Manufacturers are classified into
five groups according to their growth: percentage growth
in sales of 0-5 precent; 5-10 percent; 10-15 percent; 15- 20
percent; and 20 percent or higher. Growth rates for
individual firms ranged from a low of 4 percent to a high of
43 percent. Fastest growth rates were frequently associated
with firms in the petroleum industry (whose sales were
inflated by the sharp increase in oil prices) and firms that
merged or acquired other firms. Firms with the fastest
growth rates tend to be least liquid, have higher returns
on sales and equity, and lower debt to equity (see charts
on page 11).

Liquidity
All classes of firms but those with the slowest growth
rates (0-5 percent and 5-10 percent) had lower liquidity
ratios at the end of 1974 than at the end of 1970. Firms
with the fastest growth rates accounted for a good part of
the decline in the current ratio for total manufacturing
industries between 1970 and 1974 but also held a steadily
larger proportion
of their current assets in cash and
securities
than
other groups. Slowest growth firms
improved their liquidity between 1970 and 1974.
Debt Structure
All classes of firms except the 10-15 percent growth
class held less debt relative to equity in 1974 than in 1970.
The proportion of debt held among the five classes differed
widely, with the lowest proportion held by firms in the
slowest growth class and the highest proportion
held in
1973 and 1974 by the 5-10 percent growth class.
Profitability
All growth classes of firms but the 5-10 percent class
reported higher rates of return on equity in 1974 than in
1970. Also, all classes of firms reported higher returns on
sales in 1974 than in 1970, again with the exception of
firms with growth rates of 5-10 percent.
,
Fastest growth companies showed the highest returns
on equity in 1973 and 1974, and were the second highest
earners in previous years.

Concluding Comment
This analysis shows that financial performance
of
manufacturing firms in the aggregate was better than might
be expected in view of highly volatile conditions during the
early 1970's. However, the broad analysis conceals some
individual problems. For some firms, liquidity was strained
more seriously and servicing debt was more difficult than
indicated
for manufacturers
generally. Nevertheless,
analysis of manufacturing firms by industry, size, or growth
rates did not surface any special problem areas in a period
that might be classified as one of the most traumatic since
World War II.
This overview shows how business managers adjusted
their balance sheets during the recent volatile financial

10

market
conditions,
but it leaves unanswered
many
questions concerning what factors these business managers
considered in making these adjustments. For instance, what
is the relationship between cash flow and fixed investment
decisions? What is the relationship between highly leveraged
firms, earnings and the business cycle? What are the
trade-offs between liquidity and soundness of firms? In
what ways do small firms seek to finance their needs during
tight credit conditions? Will banks be willing and able to
finance assets, given liquidity and leverage trends of recent
years? These are among the questions this Bank will
investigate in future research projects.
j. j. Erceg

Current Ratio

Quick Ratio

3.0---------------------

0.4-----------------------------

2.0

1.0

0.2

'74

'70

'74

'70

2

'74
3

'70

'74

'70

4

'74
5

0.1

'74

No. of Firms

1.
2.
3.
4.
5.

6
25
40
22
17

0-5 Percent
5-10 Percent
10-15 Percent
15-20 Percent
20 Percent and Over
Source:

Federal Reserve Bank of Cleveland
Investors Managernen ( Science,

and
Inc.

'74

'70

'74

'70

3

2

Selected Financial Ratios of Fourth District
Manufacturing Firms by Sales Growth
Average Annual Sales Growth

'74

'70

'74

'70
5

4

Long-Term Debt/Equity
Percent
70

50

30

10
0

'70

'74

'74

'70

Return on Equity

2

'70

'74
3

'74

'70
4

'70

'74
5

Percent
17

Profit Margins

15

Percent
8

13

7
11
6
9

5

7

4

5

3
2

3

'74

'70

'74
2

'70

'74
3

'70

'74
4

'70

'74

o

5

11

COMPARATivE STATEMENTof

CONdiTioN
Dec. 31, 1975

Dec. 31, 1974

ASSETS
Gold Certificate Reserves
Special Drawing Rights Certificates
Federal Reserve Notes of Other Banks
Other Cash

.
.
.
.

$ 888,341,331
43,000,000
121,257,590
44,629,033

$ 661,606,707
33,000,000
90,672,838
30,605,087

Loans to Member Banks
Federal Agency Obligations - Bought Outright
U. S. Government Securities:
Bills
Notes
Bonds

.
.

100,000
479,750,000

300,000
398,634,000

.
.
.

2,939,681,000
3,475,489,000
436,259,000

3,116,800,000
3,391,864,000
278,356,000

Total U.S. Government Securities

.

6,851,429,000

6,787,020,000

Total Loans and Securities

.

7,331,279,000

7,185,954,000

Cash Items in Process of Collection
Bank Premises
Operating Equipment
Interdistrict Settlement Account 1
Other Assets

558,094,757
25,335,174
697,574
654,068,671
103,121,178

.
.
.
.
.

$9,769,824,308

Total Assets

527,729,755
26,335,214
-0-079,903,681
$8,635,807,282

LIABILITIES
$6,770,159,378

Federal Reserve Notes
Deposits:
Member Bank - Reserve Accounts
U.S. Treasurer - General Account
Foreign
Other Deposits

$6,233,786,708

.
.
.
.

1,689,907,719
597,027 ,539
22,846,200
18,263,605

1,269,243,074
376,618,253
25,520,000
41,980,972

.

2,328,045,063

1,713,362,299

.
.

413,832,654
96,517,013

440,514,973
92,300,702

.

$9,608,554,108

$8,479,964,682

Capital Paid in
Surplus

.
.

80,635,100
80,635,100

77,921,300
77,921,300

Total Liabilities and Capital Accounts
Contingent Liability on Acceptances Purchased for Foreign
Correspondents

.

$9,769,824,308

$8,635,807,282

.

$

$

Total Deposits
Deferred Availability Cash Items
Other Liabilities
Total Liabilities
CAPITAL

ACCOUNTS

1 Prior to 1975 this amount

12

was iricluded

in Gold Certificate

Reserves.

-0-

86,486,400

COMPARisON of EARNiNGS ANd EXPENSES
Total Current
Net Expenses

.
.

Current Net Earnings
Additions

1975
$483,991,239
38,663,613

1974
$468,639,823
36,217,420

.

Earnings

445,327,626

432,422,408

to Current Net Earnings:
.
.

3,012,563
138,099

(3,165,278)
673,549

.

3,150,662

{2,491 ,729)

.
.

21,035,480
61,300

2,988,899
435,266

.

21,096,780

3,424,165

Net Deductions
Net Additions

.
.

17,946,118
-0-

5,915,894
-0-

Net Earnings before Payments to U.S. Treasury

.

$427,381,508

$426,506,514

Dividends Paid
Payments to U.S. Treasury
Transferred to Surplus

.
.
.

$ 4,790,394
419,877,314
2,713,800

$ 4,631,401
418,281,863
3,593,250

.

$427,381,508

$426,506,514

Profit on Sales of U. S. Government
All Other

Securities

(Net)

Total Additions
Deductions

from Current Net Earnings:

Loss on Foreign Exchange Transactions
All Other

(Net)

Total Deductions

(Interest on F.R. Notes)

Total

Disposition of Gross Earnings

----

To

u.s.

Treasury

90.1%

----

Dividends

1.0

----

Operating Expenses

8.3

----

Surplus

0.6

13

As of March 7, 7976

DIRECTORS
Chairman
HORACE A. SHEPARD
Chairman of the Board and Chief Executive Officer
TRW Inc.
Cleveland, Ohio
Deputy Chairman
ROBERT E. KIRBY
Chairman and Chief Executive Officer
Westinghouse Electric Corporation
Pittsburgh, Pennsylvania
EDWARD W. BARKER
Chairman of the Board
First National Bank of Middletown
Middletown, Ohio

DONALD E. NOBLE
Chairman of the Board and Chief Executive Officer
Rubbermaid Incorporated
Wooster, Ohio

MERLE E. GILLIAND
Chairman of the Board and Chief Executive Officer
Pittsburgh National Bank
Pittsburgh, Pennsylvania

RICHARD P. RAISH
President
The First National Bank
Bellevue, Ohio

CHARLES Y. LAZARUS
Chairman
The F. & R. Lazarus Co.
Columbus, Ohio

OTIS A. SINGLETARY
President
University of Kentucky
Lexington, Kentucky
MEMBER,

FEDERAL

ADVISORY

COUNCIL

M. BROCK WEI R, President and Chief Executive
The Cleveland Trust Company
Cleveland, Ohio
OFFICERS
WALTER

WILLIS J. WINN,
H. MacDONALD,

ROBERT D. DUGGAN,
Senior Vice President
WI LLiAM H. HENDRICKS,
Senior Vice President
DONALD G. BENJAMIN,
Vice President
JOHN E. BIRKY,
Vice President
GEORG E E. BOOTH, JR., Vice President and Cashier
PAUL BREIDENBACH,
Vice President
and General Counsel
R. JOSEPH GINNANE,
Vice President
WI LLiAM J. HOCTER,
Vice President and Economist
HARRY W. HUNI NG, Vice President
R. THOMAS KI NG, Vice President
ELFER B. MI LLER, General Auditor
THOMAS E. ORMISTON, JR., Vice President
LESTER M. SELBY, Vice President and Secretary
ROBERT E. SHOWALTER,
Vice President
HAROLD J. SWART,
Vice President
DONALD G. VINCEL,
Vice President

14

President
First Vice President

OSCAR H. BEACH, JR., Assistant Vice President
MARGRET A. BEEKEL, Assistant Vice President
THOMAS J. CALLAHAN,
Assistant Vice President
and Assistant Secretary
GEORGE E. COE, Assistant Vice President
PATRICK V. COST, Assistant General Auditor
ROBE RT G. COU RY, Assistant General Counsel
JOHN J. ERCEG, Assistant Vice President
and Economist
AN N E J. E RSTE, Assistant Vice President
ROBERT J. GORIUS, Assistant Vice President
JAMES W. KNAUF, Assistant Vice President
BU RTON G. SHUT ACK, Assistant Vice President
ROBERT D. SYMONDS, Assistant Vice President
DAVID A. TRUBICA, Assistant Vice President
ROBERT VAN VALKENBURG,
Assistant Vice
President

As of March 7, 1976

CiNCiNNATi

BRANCit
DIRECTORS
Chairman
LAWRENCE H. ROGERS,
President
Taft Broadcasting Company
Cincinnati, Ohio

II

JOE D. BLOUNT,
President
The National Bank of Cynthiana
Cynthiana, Kentucky

ROBERT A. KERR,
Chairman and President
Winters National Bank and Trust Company
Dayton, Ohio

MARTIN B. FRI EDMAN,
Formica Corp.
Cincinnati, Ohio

JOSEPH F. RIPPE,
The Provident Bank
Cincinnati, Ohio

LAWRENCE C. HAWKINS,
University of Cincinnati
Cincinnati, Ohio

President

President

CLAIR F. VOUGH,
Chairman
Productivity Research International, Inc.
Lexington, Kentucky

Vice President

OFFICERS
ROBERT
CHARLES A. CERINO,
ROSCOE E. HARRISON,

E. SHOWALTER,

Vice President

DAVID F. WEISBROD,
Assistant Vice President
JERRY S. WILSON, Assistant Vice President

Vice President and Cashier
Assistant Vice President

DIRECTORS
Chairman
G. J. TANKERSLEY
President
Consolidated Natural Gas Company
Pittsburgh, Pennsylvania
MALCOLM E. LAMBING, JR., President and
Chief Executive Officer
The First National Bank of Pennsylvania
Erie, Pennsylvania

RICHARD D. EDWARDS,
President
The Union National Bank of Pittsburgh
Pittsburgh, Pennsylvania
R. BURT GOOKIN,
Vice President and
Chief Executive Officer
H. j. Heinz Co.
Pittsburgh, Pennsylvania
WILLIAM H. KNOELL,
Cyclops Corporation
Pittsburgh, Pennsylvania

WILLIAM E. MIDKIFF,
III, Chairman of the Board
First Steuben Bancorp, Inc.
Toronto, Ohio
ARNOLD R. WEBER, Dean
Graduate School of Industrial Administration
Carnegie-Mellon University
Pittsburgh, Pennsylvania

President

OFFICERS
ROBERT D. DUGGAN,
SAMU EL G. CAMPBELL,
Vice President and Cashier
PAUL E. ANDERSON,
Assistant Vice President

Senior Vice President
CHARLES A. POWELL, Assistant Vice President
WILLIAM
R. TAGGART,
Assistant Vice President

15


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102