(Bloomberg Opinion) -- When third-quarter earnings reports come out in a few weeks, the bottom lines of companies in the S&P 500 are expected to be up an average of nearly 20 percent compared with the quarter a year earlier, signaling a continuation of good times for corporate America. Profits rose just more than 24 percent in the second quarter.
But another metric of financial health suggests all may not be as rosy as it first appears. The tangible net worth, or book value, of S&P 500 companies has been falling this year. The last time it had a sustained drop was right after the financial crisis in 2008. The time before that was in the previous recession in 2001.
The latest dip is not a new trend. The tangible book value of the S&P 500 companies peaked in 2014 and has dropped ever since. But tangible book values had begun to bounce back last year. What’s more, with this year’s dip, the S&P 500’s tangible book value has surrendered nearly all of its gains since the rebound from the financial crisis. At $2.45 trillion, the value, which is a calculation of assets minus liabilities, is the lowest since the end of 2010.
Several trends are converging to deflate corporate net worths. Low interest rates have encouraged borrowing, doubling corporations’ debt load in the past decade, which subtracts from book value. Stock buybacks, too, thanks to the change in the tax law, have boomed this year. That drains cash from corporate balance sheets and has also lowered book values. But the fact that earnings are not adding enough new cash to refill corporate capital buckets and then some is also contributing to the drop. Despite the jump in earnings, cash flow from operations is up much less, just 4 percent in the past 12 months, compared with the period a year earlier.