Profit Warnings – A Guide to Financial Health

The first evidence of a deterioration in financial performance can often be seen in the number of quoted companies (ie. the largest that are listed on the FTSE) issuing profit warnings.

In the global downturn at the beginning of the new millennium, for instance the number of such profit warnings jumped to 508 in 2001 before falling back to 347 in 2002.

Even an economy in a reasonably healthy state generates a certain level of profit warnings. In the period between 2003 and 2007, when the UK economy was growing relatively strongly, the number of companies issuing profit warnings averaged 320 a year. There will always be some companies, or perhaps some sectors, which will struggle.

The number of warnings, however, began to pick up at the end of 2007 and into 2008 amounting to 449 for 2008 as a whole. In the first half of 2009 a further 117 companies issued warnings as the economy showed further signs of weakness.

Surprisingly, however, only 63 companies issued warnings in the second quarter, more than a third lower than in the same quarter a year earlier. Whether this drop in the number of distressed companies is a tentative sign of recovery in the company sector or a statistical glitch is unclear. Only time will tell.

Source: ONS