Profit warnings from listed businesses in the Midlands hit a record low in the second quarter (Q2) of 2021, according to a new report.
The latest EY-Parthenon report found that five profit warnings were issued from firms in the region during April, May and June – a reduction of 67 per cent on the same period in 2020.
While across the UK, just 32 profit warnings were issued – the lowest quarterly total EY has recorded in more than 22 years of profit warning analysis.
The record low comes in stark contrast to the record high of 301 in the first quarter of 2020 and the second highest ever total of 165 in the second quarter of last year.
Similar dips were recorded in 2002/3 and 2009 after 9/11 and the global financial crash, respectively.
The EY analysis suggests that a better-than-expected recovery and Government support, as well as the fact that markets tend to over-correct, meant that all but a handful of companies beat depressed forecasts.
Dan Hurd, EY-Parthenon UK&I’s turnaround and restructuring leader in the Midlands, said: “Whilst it’s encouraging to see that profit warnings amongst Midlands-based listed businesses remain historically low – a continuation of what we saw at the start of the year – it’s also symptomatic of a wider reset of the UK economy.
“The number of profit warnings issued by Midlands-based listed businesses is at its lowest since Q3 2018. However, businesses face challenging times as they look to emerge from the global pandemic and develop fresh strategies that focus on resilience and making the most of new opportunities and potential for growth.”
Dan added: “Two of the most immediate challenges stem in part from the strength of the recovery. Rapid increases in global demand have triggered sharp increases in raw material prices, shipping delays, supply bottlenecks and labour shortages — exacerbated in some cases by the impact of Brexit and ongoing pandemic restrictions.
“This may be a temporary headwind, but it will put pressure on working capital and limit some companies’ ability to fully capitalise on the recovery.
“Strong domestic growth is also allowing the UK Government to reduce its extraordinary level of business support. When companies restart this will put heavy demands on cash, and companies reliant on Government support could face a significant cash squeeze — especially where costs are high, and demand remains uncertain or constrained.”
Across the UK, the highest number of warnings (11) came from the businesses in the industrial sector which cited supply chain issues among its main challenges, while in the Midlands, profit warnings were split across a number of sectors.
Meg Wilson, EY-Parthenon partner for turnaround and restructuring strategy, said: “The economic outlook is improving, but for many companies there is still uncertainty. Businesses reopening or expanding their trading are balancing the investment and costs needed to meet increased demand against the removal of Government support and the potential for setbacks.
“They also need to be mindful of how cash is flowing through their supply chains.
“Companies in rebuild mode need to be vigilant to their exposure to contingent or ‘soft credit’, be it direct or indirect, for example through credit insurance – an important but often overlooked element of liquidity.”