Businesses’ financial distress levels rise 9%

There has been a 9% hike in the number of businesses experiencing ‘significant’ financial distress at the mid-way point this year compared to last, although the levels are now increasing at a slower rate than earlier in 2018, according to analysis from Begbies Traynor

The firm’s Red Flag Alert research for Q2 2018, which monitors the financial health of UK companies, shows 472,183 businesses were experiencing ‘significant’ financial distress at the end of June 2018, up 9% on Q2 2017’s total of 434,492 but down 1% compared to the previous three months of this year.

Levels of financial distress are currently increasing at 25% year on year, which is lower than the 33% reported in Q1 2018 and Q2’s 36% rate of increase. 

The sectors with the highest number of businesses in distress year on year were support services (112,434, up 10%), construction (60,208, up 4%), real estate (42,254, up 19%), telecoms (31,770, up 9%) and general retailers (30,574, up 4%).

Businesses in the South of England continued to see the biggest deterioration in their financial health, with London being the UK’s worst performing region, where ‘significant’ distress impacted 118,367 companies in the capital alone (up 17% year on year, but down 1% compared to Q1 2018).

According to the research, 251,495 UK businesses ended the period in a position of negative net worth, while 109,717 demonstrated a considerable increase in their working capital deficit, with both key indicators of financial distress.

Julie Palmer, partner at Begbies Traynor, said: ‘Although the volume of businesses in “significant” financial distress remains at relative highs after four consecutive quarters of accelerating distress, the rate of deterioration in UK corporate health has slowed during Q2 2018, supported by recovering business and consumer confidence, higher levels of employment, and continued interest rate stability.

‘Looking forward, while there’s a chance this positive trend could continue, the outlook for certain industries is looking increasingly uncertain. The problems facing high street retail have been well documented of late, with the recent epidemic of CVAs and store closures being just the tip of the iceberg. However, the UK automotive sector looks to be most at risk in our view, facing job cuts and a slowdown in production output and investment, as industry pundits question how it will be able to compete with European competitors post Brexit.’

Profit warnings

Separate research from EY shows UK profit warnings rose substantially year-on-year to 58 in Q2 2018, with quoted companies issuing 13 (29%) more warnings than the same period in 2017.

The rise was largely focused on the consumer sector, and almost a quarter of FTSE general retailers warned in the first half of 2018, with the sector issuing 20 warnings (13 in Q1 and seven in Q2), double the figure set in H1 2017 and a seven year high. The software and computer services sector issued six warnings in Q2 and the travel and leisure sector five.

Alan Hudson, EY’s head of restructuring for UK & Ireland, said: ‘We’ve reached half-time in 2018 with forecasts on the line. An exceptional summer has boosted consumer spending; but growing downside risks at home and abroad look more enduring. At the same time the retail revolution continues to reshape the high-street and operational models, leaving more companies in its wake.

‘Beyond the consumer sphere, profit warnings could rise from their low base, if uncertainty delays decision making. The proportion of profit warnings citing delayed or cancelled contracts reached a six-year high in 2018. Many companies cannot say with any certainty what trading and regulatory regimes they’ll be operating under this time next year.’

Report by Pat Sweet

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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