Number of UK Profit Warnings Fall for First Time Since 2021

Figures released by Ernst & Young’s strategic arm, EY-Parthenon, show that the number of profit warnings from UK businesses has dropped for the first time in two years.

Quarter three saw 76 profit warnings issued compared to 86 in the same period last year. This is in contrast to the seven previous quarters that had become the longest consecutive string of year-on-year increases the UK had seen for 14 years.

Unfortunately, despite the slight fall, the figures are still 18% higher than the average quarterly numbers recorded after 2008’s worldwide financial crisis. While those statistics keep the recent drop in perspective though, any fall in profit warnings should be welcomed in the current economic climate. Many will hope this could mark the start of a turnaround in fortunes, but in reality, few external forces have changed significantly enough to have such an effect.

Among the reasons behind the 76 profit warnings issued in Q3, a third of businesses blamed difficult credit conditions. Jo Robinson, EY-Parthenon Partner and UK&I Turnaround and Restructuring Strategy Leader remarked that “the growth of credit-related warnings indicates that pressure on businesses is unlikely to easy for the foreseeable future. In fact, we’re seeing economic stresses extend up the value chain, spreading to mid-market companies.

“It’s clear from this data that the steepest rise in interest rates in 40 years continues to take its toll, with a high proportion of warnings due to an increasingly expensive borrowing environment. This poses a risk for companies that are due to refinance and we’re already seeing this affect sectors where credit is a key activity driver, such as in the housing market”.

Indeed, EY-Parthenon’s findings also revealed that one in five of Q3’s profit warnings referenced the slowing housing market as a driver. This has no doubt also had the partial knock-on effect of 45% of FTSE home construction services issuing profit warnings in the last 12 months.

It’s not just the construction industry that’s suffered, though. Listed software and computer services have issued 46% more warnings than the same point last year, while FTSE media firms have seen the number of profit warnings among them double since Q3 2022.

Thankfully, extended debt maturities and stronger balance sheets have seen most pull through, but Robinson cautioned that UK businesses shouldn’t be too confident of their prospects, warning that “businesses that are at risk should act immediately to reshape operations to withstand future shocks. Delaying action risks damaging business value, particularly in this fast-moving market”.

Eyes move now to Q4’s figures in the hope that the ‘golden quarter’s vaunted ability to elicit an upturn in revenue can provide a second consecutive drop.

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