It found that 80 of the 200 companies analysed are in fact, in more debt now than they have been in the last four years. Using other people's money to finance your company is, it seems, an increasing trend.
David Pattison, head of research at Plimsoll, commented. "We are always surprised how no one at these companies seems to realise their debts are rising and the effect it's having on the overall financial strength of the company. Unfortunately it's not something they tend to measure until it's too late. Our analysis spots these problems earlier."
The Plimsoll analysis points to the 55 companies amongst the 80 where the debts are already impacting on their business and their competitiveness. Warning signs are often present up to 2 years before the debt problem becomes serious. Companies tend to swap short term debt for long term debt. This has little effect on the companies overall financial strength, particularly if the debts keep rising. It's often a sign that the banks are concerned and are looking for more security. 11 such companies are named in the Plimsoll analysis.
As the debt increases the company's profitability will start to erode. Interest payments can in extreme cases, absorb all the profits. With rates rising, this will put further pressure on profitability. For three sound equipment companies, high interest payments alone have already tipped them into loss.
As this starts to take effect the company will push for extra growth. This puts further pressure on profitability, requiring extra working capital which frankly just encourages even more debt. At the 80 companies with high debts growth was good for 17 companies, seeing sales increase in the year. However, if these debts are allowed to go unchecked, any disturbance to the business could end in disaster. The loss of a key client, a large bad debt and even increases in interest rates could be the straw that breaks the camel's back.
The full publication contains an individual profile for each of the largest 200 sound equipment companies. Aimed at non-accountants, it simplifies the key performance measures and uses a series of graphs to plot load lines. These conclusive charts give both non-financial and financial readers a visual summary of each of the companies in the market. Copies of the analysis are available for £350 by calling 01642 626400. Readers can request a 5% discount.
(Chris Henry)
