KPMG: one in five UK businesses in financial stress

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One in five UK businesses are financially stressed, with more than 1,000 companies in situations of acute distress, according to new research from KPMG.

KPMG’s Restructuring practice analysed the filings of all UK businesses with revenues in excess of £10m over a five year period to the end of 2018 – a population which grew from around 22,000 in 2014 to 27,000 in 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 rose from 19% to 21%, whilst those identified as distressed remained fairly steady at 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 UK businesses have increased from circa 4,300 in 2014 to 5,700 in 2018 – a compound annual growth rate of 7.7%. Businesses in more acute financial distress have grown from just under 800 in 2014 to nearly 1,100 in 2018 – a compound annual growth of 8.9%.

Blair Nimmo, head of Restructuring at KPMG in the UK, says: “Whilst the number of companies bringing in revenues of over £10m has grown strongly over the last five years – highlighting the underlying strength of the British 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.”

Blair Nimmo continued: “When we talk about ‘stress’, we typically mean companies which 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.”

Sector analysis

KPMG’s analysis reveals that, in simple volume terms, the sectors which bear the largest numbers of companies in financial stress and distress are (1) Retail; (2) Leisure & Hospitality; (3) Building & Construction; (4) Industrial Manufacturing; and (5) Consumer Production.

Blair Nimmo explained: “The fact that consumer-facing businesses, such as retailers, leisure businesses and those in the FMCG sector 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.”

Nimmo continued: “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.”

He added: “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.”

However, analysing the percentage of companies in each sector which display financial red flags paints a different picture, highlighting other industries which are experiencing stress more acutely. For instance, over a third of companies in the Aerospace sector are experiencing some sort of financial stress, compared to fewer than one fifth of those operating in the retail sector. Other sectors which appear to be particularly vulnerable include (1) Consumer Finance; (2) Power & Utilities; (3) Healthcare; and (4) Leisure & Hospitality.

Nimmo concluded: “Delving deeper into the numbers reveals a swathe of industries experiencing significant stress and distress – but which perhaps go under the radar compared to other more high-profile sectors.

“For instance, the UK’s Consumer Finance sector is in the midst of a significant shake-up as increased regulatory pressure and mis-selling scandals have pushed under-capitalised businesses to the brink.

“Similarly, in the power & utilities space, we’ve seen a number of insolvencies of small domestic energy suppliers, which to put it bluntly, can be attributed to the volume of small web-based start-ups offering fixed price deals without the balance sheet strength or sophistication in terms of their hedging strategies to ride out wholesale market movements.

“Meanwhile, the effect of significant trade tensions in the Aerospace sector, including US-China tariffs; the impact of state aid disputes; and the grounding of the Boeing 737 Max aircraft, has prompted a general slowdown across the market, which in turn has placed more pronounced pressure further down the supply chain.

“Finally, our analysis reveals that a number of organisations in the private healthcare and dental market are experiencing financial stress, in no small part due to the ever-increasing competition across the sector. As more and more companies compete for referrals, they have a duty to maintain clinical expertise, staffing levels and ensure their facilities are up to regulatory scratch, whilst also spending money on marketing, IT, and building relations with insurers to secure referrals.”