Treasury News Network

Learn & Share the latest News & Analysis in Corporate Treasury

  1. Home
  2. News

EBITDA margins could shrink over 30% by 2027 - Industry roundup: 16 February

EBITDA margins could shrink over 30% by 2027

By 2027, weak demand and rising costs will shrink earnings before interest, taxes, depreciation, and amortisation (EBITDA) margins by more than 30% relative to 2022, according to Gartner, Inc. Most corporations will find it more challenging to attain growth through 2026 as elevated levels of consumer debt and weaker-than-expected corporate cash flow dampen demand by reducing both discretionary and non-discretionary spending.

Tepid GDP forecasts for advanced economies pegging annual revenue growth at the 2% range, labour costs in the US and eurozone growing at approximately 5% annually, technology costs globally at 8%, and increases in other categories capped at the US long-term expected inflation rate of 3%, can result in shrinking EBITDA margins over the three-year period.

“Ongoing uncertainty and instability will expose organisations to sudden cost surges in the coming years,” said Randeep Rathindran, distinguished vice president, research, in the Gartner Finance practice. “CFOs must intervene early to mitigate margin squeezes and confront spiralling expenses driven by the labour market, climate change, and digital transformation.”

Most companies will be unable to deliver the profitable outcomes investors have come to expect across much of the last decade, as the convergence of low rates, suppressed wages, and steady economic growth that enabled those results no longer exists. This will lead many organisations to seek new strategies for hitting earnings targets. Organisations will struggle to manage the gap between reality and perception of cost savings from continued investments in automation. Without true end-to-end process automation, any time savings from automation will be fractional (e.g., displacing one-third of a full-time employee but not a whole one).

Traditional sources of capital funding, such as bank lending or bond issues, will become less viable as lenders and investors put greater scrutiny on near-term payback risk. Small or midsize margin-tight companies may struggle to cover interest expenses and become “zombie” companies confronting the prospect of bankruptcy or acquisition.

“Reliable strategies that CFOs have employed to mitigate similar market conditions in the past, such as selling, general and administrative expenses (SG&A) cost reductions, are no longer as feasible or effective given that expensive investments in digital technology and skills are necessary for transforming corporate functions,” added Rathindran.

In response to market conditions that will continue to shrink EBITDA margins for the foreseeable future, Gartner suggests that CFOs should recalibrate stakeholder expectations regarding financial models. Conducting a stress test of financial assumptions around run rates for revenue, volumes, and costs can help identify potential gaps between reality and perception. CFOs can consider right-sizing selling, general, and administrative costs by taking a broader view of cost optimisation. This is not exclusive to just cost-cutting but also cost-avoidance, cost-shifting, and value optimisation to find savings while protecting critical organisational capabilities and transformation investments.

“CFOs can help their organisations overcome reliance on high-interest debt by broadening their view of funding sources beyond bank lending and corporate bonds,” concluded Rathindran. “Financial leadership should explore secondary equity issues, venture capital, and non-dilutive financing options such as public-private consortia.”


Fed’s Barr moves to calm banking fears

In a speech at the 40th Annual National Association for Business Economics (NABE) Economic Policy Conference in Washington, D.C., the Federal Reserve’s Vice Chair for Supervision, Michael S. Barr, commented that the US banking system remains sound and resilient and is in much better shape than it was last spring. However, he noted there are a few pockets of risk that the Fed continue to watch, including the pandemic's persistent impact on office commercial real estate in certain central business districts.

Barr noted that a couple of weeks ago, disappointing earnings and higher loss provisions at New York Community Bank precipitated significant declines in stock prices. However, he stressed that a single bank missing its revenue expectations and increasing its provisioning does not change the fact that the overall banking system is strong and that the Fed currently sees no signs of liquidity problems across the system. 

Reflecting on the banking turmoil of March 2023, Barr stated that a lesson learned had been that bank runs can materialise with unprecedented speed and severity, spreading contagion. The runs on the likes of Silicon Valley Bank (SVB), Signature Bank and First Republic were partly driven by imprudent funding reliance on uninsured deposits placed by concentrated and often highly networked customer bases. These deposits proved flightier than previously assumed. He gave the example of SVB's depositors being heavily concentrated in venture capital and technology-sector firms, Signature Bank having uninsured depositors from crypto-related firms, and First Republic having high concentrations of high-net-worth uninsured depositors. 

In the 11 months since, Barr reflected that many banks have been analysing these dynamics and have taken steps to address these risks. He added that he remains focused on how bank readiness to tap the Fed's discount window can be improved. The discount window provides ready access to liquidity, including when forms of market funding come under strain. But banks should make some preparations to be fully prepared to tap the window, Barr flagged.  


US same day ACH surpasses 3 billion payments

Led by strong growth in Same Day ACH and business-to-business (B2B) payments, the US ACH Network securely handled 31.5 billion payments valued at US$80.1 trillion in 2023, data from Nacha reveals. Payment volume for the year was up 4.8% from 2022, while payment value grew 4.4%. 2023 marked the eleventh consecutive year in which ACH Network value has increased by more than US$1 trillion. 

Same Day ACH volume increased 22.3% and 41.2% in value, to 853.4 million payments worth US$2.4 trillion. Since its inception in September 2016, Same Day ACH volume has surpassed 3 billion payments and US$6 trillion. 

B2B payments continued to grow in 2023, with 6.6 billion payments, a 10.8% increase, as businesses continue to use fewer cheques. Healthcare claim payments to medical and dental providers rose 7.7% to 488 million. 

Consumer internet-initiated payments rose 5.7% to 9.9 billion, primarily supporting bill payment and account transfer use cases. Direct Deposit volume increased 3.3% over 2022, with 8.3 billion payments to consumers. 

Nacha also released ACH Network results for the fourth quarter of 2023, in which 8.1 billion ACH payments were made with a total value of US$20.5 trillion, increases of 5.8% and 5.6%, respectively, over the same period in 2022. There were 255.8 million Same Day ACH payments, up 41%, while the value of those payments was US$662bn, up 31.5%.


Taulia and IFC to build sustainable SCF programmes

Taulia has announced its collaboration with International Finance Corporation (IFC), a member of the World Bank Group, to build sustainable supply chain finance programmes for small and medium-sized enterprises (SMEs) in emerging markets.

IFC is Taulia’s inaugural multilateral funder and adds to its multi-funder network, which aims to enable the business to access an increasingly broad and diverse funding pool. Multifunder models within supply chain finance programmes are designed to provide resiliency through diversification and a wider pool of funding for different currencies, geography, client size, and credit profiles. Combined with the right technology, it enables businesses to hedge against liquidity risk, particularly during periods of economic uncertainty.

IFC will assist Taulia in developing its sustainable supply chain financing programmes, supporting SMEs in emerging markets with enhanced access to financing solutions, where such opportunities are often limited. By combining Taulia’s supply chain financing technology with IFC’s global reach and influence, the collaboration aims to offer efficient and sustainable solutions for SMEs using early payments and working capital programmes.

The collaboration will draw on IFC’s own commitment to sustainable supply chain finance under its Global Trade Supplier Finance (GTSF) Program, which recently doubled in size to US$1bn and extends financial discounts to emerging market suppliers that improve their social and environmental performance.


Seagate Technology pursues digital evolution with SAP S/4HANA

SAP has announced the launch of SAP S/4HANA and the SAP BW/4HANA solution at Seagate Technology Holdings, a provider of mass-capacity data storage solutions. It will modernise the company’s enterprise resource planning (ERP) system and benefit nearly 30,000 global employees through integrating advanced functionalities, such as enabling global manufacturing, supply chain and finance business processes. 

This news signifies Seagate’s third phase of digital transformation, complementing SAP Integrated Business Planning for Supply Chain and SAP SuccessFactors solutions. Seagate embarked on this transformative path in 2021, transitioning from its legacy systems to SAP. Seagate’s move to SAP S/4HANA should provide the company with improvements in supply chain management, manufacturing execution, and even ongoing transformation. 

“We chose SAP solutions for our integrated ERP landscape because its strategy closely aligns with our own: to implement a foundational platform on which the business can scale and grow,” said Grace Liu, senior vice president and chief information officer at Seagate.


FIS collaborate with Banked on open banking access

FIS has entered a strategic partnership with Banked, a provider of open banking solutions, to drive new pay-by-bank offerings for both businesses and consumers. Pay-by-bank solutions aim to simplify payments by combining the benefits of real-time payment rails with the flexibility and efficiency of open banking, where third-party financial service providers have direct access to banking data to complete digital payments. As a result, businesses and consumers can make payments directly between business and consumer bank accounts without needing card details, account numbers or sort codes. Businesses benefit from less fraud, reduced friction, faster settlement and lower processing fees, while consumers enjoy a smoother payment experience, easier verification and quicker access to funds.

Digital payments are experiencing significant growth due to consumers’ increased adoption of digital wallets and mobile payments apps. They have become the preferred method of fulfilling payments for both merchants and consumers, and the 2023 FIS Global Payments report found that account-to-account (A2A) payments like pay-by-bank generated an estimated US$525bn in 2022 e-commerce transaction value. The report also projects A2A payments will grow at a 13% compound annual growth rate.

"Corporations and consumers are clamouring for solutions that move their money easier and faster, and as open banking and fraud prevention mature, FIS is in a unique position to start offering pay-by-bank solutions for both businesses and consumers,” said Seamus Smith, Group President, Global Business to Business Payments, FIS. "Partnering with Banked is a proof point of FIS’ commitment to bring frictionless payments to a wider spectrum of critical industries in a secure, convenient and cost-effective manner and complements the investments we’re making in next-gen payments infrastructure.”

Like this item? Get our Weekly Update newsletter. Subscribe today

Also see

Add a comment

New comment submissions are moderated.