‘Growth at the expense of profits’ warning for region

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PROFIT warnings from Yorkshire’s listed businesses increased by 75 per cent in the third quarter, new figures reveal.

The findings, from accountancy firm Ernst & Young, contrast to a more positive UK picture.

Seven warnings were made in the region between July and September, the highest number recorded in a third quarter in the last five years.

The sectors to issue warnings include support services, alternative energy, electronics, food and drug retail and general financial, said EY.

Hunter Kelly, restructuring partner, says: “Overall the economic outlook is still improving and perhaps there is a sense that we’re moving onto the next stage of the recovery, where growth may come at the expense of profits.

“In the last few years, companies used a mixture of cost cutting and operational improvements to boost earnings, but now we’re seeing a combination of deep operational restructuring – including strategic divestments – coupled with economic growth.

“However, any false assumptions as to the path of that growth will quickly reflect in forecasts.”

In comparison to Yorkshire and the North East, the number of warnings issued by UK listed businesses rose by just 3 per cent in the third quarter.

However, there was a sting in the tail for UK plc with a late spike in warnings in September – the highest level seen in this particular month since the height of the financial crisis in 2008, said EY.

If profit warnings are any indication, the recovery is leaving one critical group of companies behind. Smaller companies – those with a turnover under £200m – have issued more profit warnings in the first three quarters of 2013 than over the same period in
2012.

This compares with a 34 per cent fall in profit warnings from companies in the £201m to £1bn turnover band.

Mr Kelly said: “Smaller companies are inherently more vulnerable to profit warnings since they are more likely to find a squeeze on sales or change in pricing having a more material effect on profit expectations, although this doesn’t entirely explain why their fortunes are diverging now.

“Perhaps their smaller management teams make it more difficult to plan and make the best of the upturn.

“Whatever the reason, if the earnings of smaller companies are recovering less quickly than expected, they may be less able to drive economic and employment growth - and that has implications for the entire economy.”

Mr Kelly said concerns remain over the strength of the economic recovery, which is based on consumers providing the impetus for growth, although they are yet to feel the benefit.

He added: “Increasingly optimistic business surveys imply that wages and investment will provide the UK recovery with greater breadth and stability in 2014.”