Written by: Keith Tully
Published: 15th January 2020
As many as one in five UK companies are in a position of financial stress, with retailers, leisure and hospitality businesses and construction firms among those most likely to find themselves under pressure.
Recent research by KPMG looking at companies with annual turnover in excess of £10 million found that around 21 per cent of those operations were financially stressed as of 2018.
The relevant figures were assessed over several full-year periods, with the number of companies turning over more than £10 million a year having increased from 22,000 in 2014 to nearly 27,000 in 2018.
In absolute terms, the number of companies with stressed finances increased from 4,300 to 5,700 during that five-year period, with the proportion of firms feeling the strain having gone from 19 per cent to 21 per cent, according to KPMG.
A variety of metrics were used to assess the finances of the companies involved in the research, including trading performance and profitability, cashflows and liquidity, and debt leverage.
Signs of ‘stress’ in these contexts were taken to be indicators such as negative cashflows or defaults on debt repayments among companies with high debt-to-equity ratios.
The number of companies believed to be in positions of ‘acute financial stress’ increased between 2014 and 2018 from around 800 to almost 1,100, according to KPMG’s investigations.
“Taken individually, all [indicators of financial stress] can be relatively manageable,” explained Blair Nimmo, head of restructuring at KPMG UK.
“However, an accumulation of such factors can indicate a company is veering towards distress - and possibly insolvency.”
The retail sector is rated by KPMG as having the highest number of stressed companies in terms of volumes, followed by the leisure and hospitality sector and then the building and construction sector.
Further down the list of sectors with the most stressed companies are industrial manufacturing and consumer production.
Mr Nimmo describes it as “no surprise” to see consumer-facing companies such as retailers featuring prominently on the list of most stressed sectors given the nature of the economic headwinds they’ve been facing in recent years.
“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,” he said, reflecting the latest figures.
“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.”