One in five Southern businesses are financially stressed, according to new research from KPMG.
KPMG’s restructuring practice analysed the filings of all UK businesses with revenues in excess of £10 million over a five-year period to the end of 2018. For each filing, KPMG analysed a range of metrics including trading performance and profitability; cashflow and liquidity; and debt leverage, which were then combined to produce a score to identify financial stress and distress.
Across the five years, the proportion of businesses in financial stress remained around the 20% mark, with those identified as distressed also remained fairly steady at 3-4%. However, the overall growth in the number of companies with revenues exceeding £10m over the course of those five years means that in absolute terms, financially stressed businesses have increased from under 600 in 2014 to more than 800 in 2018.
Sarah Collins, head of restructuring for KPMG in Reading, said: “Whilst the number of companies bringing in revenues of over £10m has grown strongly over the last five years – highlighting the underlying strength of our economy – there’s no doubt that such growth can bring with it significant challenges.
“Whether its long-established companies battling against well-known economic headwinds, or those entrepreneurial scale-ups who are struggling to maintain a grip on cash flow during periods of rapid growth, the fact is that without action, stress can very quickly turn into distress.
“When we talk about ‘stress’, we typically mean companies that may have experienced instances of negative cashflow or working capital, defaulting on debt repayments or with a high debt-to-equity ratio. Taken individually, all can be relatively manageable. However, an accumulation of such factors can indicate a company is veering towards distress – and possibly insolvency.”
KPMG’s analysis reveals that, in simple volume terms, the sectors which bear the largest numbers of companies in financial stress and distress over the last five years in the South are retail; industrial manufacturing; and technology (in that order). While going into 2020, the retail, building and technology sectors have the most companies in financial stress.
Collins explained: “The fact that retailers dominate our analysis of companies in stress and distress will come as no surprise. Consumer attitudes towards spending remain in a huge state of flux. We continue to have more choice over what to spend our money on, and where to spend it, yet remain cautious in doing so – no doubt due to sluggish wage growth and wider economic uncertainty.
“Mix fragile consumer confidence with the burden of high rents, business rates and increased labour costs, and it’s clear that many of those who operate on the high street will continue to tread the fine line between stress and distress over the year ahead.”
She added: “As the most recent PMI and corporate insolvency figures showed, companies in the building and construction sector are also buckling under significant strain, particularly those at the larger end of the market which historically operate on wafer thin margins. As 2020 trading gets underway, companies across the sector will be hoping that the newfound political certainty brought by the recent general election will see the taps on large-scale infrastructure projects turned back on.
“Prolonged uncertainty around Brexit, as well as the re-introduction of import tariffs at key routes in the global supply chain have caused fierce headwinds for the UK’s industrial manufacturing base. Couple this with a move towards alternative and sustainable packaging in certain sub-sectors; deferred capex investments; higher input costs and low productivity as a result of skills shortages, and it’s clear to see why many of our industrial manufacturers are experiencing financial stress.”