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September 11, 2019

Three profit warnings and you’re likely out!

EY has been tracking UK profit warnings for 20 years. Analysing some 6000 profit warnings, the firm said: “Most striking of all are the results of a thought-provoking study we’ve undertaken into the impact of issuing three or more successive profit warnings. For a fifth of these companies, it is a case of three strikes and you’re out – and this is happening quicker than ever.” Half of companies that do so will have lost their CEO and 40% their CFO.

Over the last two decades, an average of 15% of UK companies have issued warnings each year. In the toughest year, 2001, it was 23%. Profit warnings can sometimes be unavoidable, for example after extreme economic or sector shocks, but they are not inevitable. Most companies don’t issue profit warnings.

EY said behind the numbers, many of the problem contracts triggering multiple profit warnings have flaws in their inception and execution, often exacerbated by a slow or insufficient response. Management teams that have weak visibility across their business and poor internal controls won’t spot problems early. Companies that don’t respond quickly to changes in their market, risk falling into a negative spiral of falling customer and investor confidence.

Analysis of multiple profit warnings (companies that issue a chain of three or more profit warnings in one year) shows that third warning is often the final blow and capital is becoming ‘flightier’.  Using this measure, 18% of companies that have issued a profit warning in the last 20 years has gone on to issue multiple warnings. Most of these come from the sectors identified as being structurally vulnerable to warning, which also makes them vulnerable to multiple warnings if they don’t get a handle on their problem.

A year after companies issued a chain of three or more profit warnings:

  • 25% have had a breach or waiver of covenant
  • 20% of companies have delisted
  • 10% have gone into administration
  • 9% have recovered their share price

In total, around 18% of companies will experience a restructuring event (administration, CVA, debt restructuring or distress sale) within a year of issuing a chain of three or more warnings.  

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