What Happens to Companies in a Recession: Half Change Phase

In a calm year a company rarely "jumps" from one phase of its life cycle to another. In a recession, that is exactly what happens. In a panel of 13 public Bulgarian companies tracked over 2006–2021, the share of firms that switch phase jumps from 15–17% in normal years to about 54% in a recession year. So in a crisis roughly half of firms move — and the direction is surprisingly consistent.

This article explains what a company's "phase" is, where the 54% comes from, and why understanding it stops you from mistaking a temporary cycle effect for lasting weakness in the business.

What a company "phase" is

Dickinson's method (2011) defines a company's phase not by age or size, but by the signs of its three cash flows — from operating, investing and financing activities. The combination of pluses and minuses gives the phase:

The idea is simple: a young firm burns cash and raises capital; a growing one earns, invests and still raises; a mature one earns, still invests, but returns capital (repays debt and pays dividends). Compute the phase for a specific company in the Company cycle profile calculator — enter the three flows and get the phase plus the panel context.

The number: half of firms move in a crisis

If the cycle didn't matter, the share of phase switches would be roughly the same every year. It isn't. In the sample the share of "downgrades" (moves down the cycle) is 15–17% in normal years and about 54% in the recession years — 2009 and 2020. The gap is not chance: a year-shuffling test puts the probability of it being a coincidence at around 1%.

An important caveat: this is a share across 13 surviving firms and two recessions — it describes direction and order of magnitude, not a probability for any single company.

Which way they move: Growth → Mature

The shift isn't random. The most common move in a crisis is Growth → Mature, and the reason lies in one specific cash flow — the financing one. In good years a growing firm raises capital (financing flow +). In a crisis it stops taking on new debt and starts repaying it — the financing flow flips to minus. The combination "+ operating, − investing, − financing" is exactly the definition of maturity.

In other words: the firm hasn't stopped earning. It has stopped borrowing and started paying down loans — classic behaviour when credit tightens. A method that reads the phase from cash flows records this as a phase change, even though the business is the same.

Why it matters for an investor

Here is the trap. If you see a company "fall" from Growth to Mature in 2009 or 2020, the first question is not "what's wrong with it" but "what kind of year was it". In a recession a phase change is so common that it is more the rule than a warning sign. Conversely — a firm that keeps its growth phase through a crisis genuinely stands out.

That is why reading the phase should always go with the macro context. See what phase Bulgaria's economy is in now and how different recessions hit different sectors — 2009 flattened the exporters, 2020 hit tourism, while medicine passed through both almost untouched.

What this does NOT mean

• The past is not the future. A share measured over two past recessions does not predict the next one.
• Not a recommendation. A phase change is not a buy or sell signal — it is a description, not a diagnosis.
• The numbers are a guide. 54% is an order of magnitude from a small sample, not a probability for a specific firm.

Continue from here

• Company cycle profile — compute the phase from the cash flows.
• Which BSE companies passed 2009 and 2020 unscathed — the other side of the coin.
• How to read a financial statement — where the three cash flows come from.
• The great stock market crashes in history — the context around 2009 and 2020.

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