UK profit warnings soar 66% as inflation risks more debt distress

The number of profit warnings issued by UK-listed companies in the first six months of the year surged by 66 per cent as inflation dented earnings, according to a report by consultancy firm EY-Parthenon.

It comes as Deliveroo on Monday cut its annual sales forecast dramatically after revealing a fall in demand for takeaways as customers cut back on spending because of the cost-of-living crisis.

The takeaway delivery group now expects full-year gross transaction value growth this year to be in the range of 4-12 per cent, compared with its previous guidance of 15-25 per cent.

Warnings came from 136 firms in the first half of the year, with travel, leisure and retailers among the FTSE sectors with the highest number in recent months. Of those, 58 per cent cited rising costs as one of the main reasons behind their profit misses. A further 19 per cent said they were having problems in the labour market. Supply chain issues were also prominent.

The figure is seen as a signal that the number of candidates risking debt defaults is on the rise.

The researchers found that of 1,222 companies listed in the UK, a full 70 had issued at least two consecutive warnings in the last 12 months. It said that one in five companies delist within a year of issuing a third profit warning, mainly due to failure.

The number of loss-making corporates globally could double to 17 per cent by 2023 if economies suffer from stagflation, according to a recent report by S&P Global.

“Demand headwinds and falling confidence will have a much blunter impact and expose more underlying stresses,” said Alan Hudson, EY’s head of turnaround and restructuring strategy in the UK and Ireland.

A shift in Bank of England policy to higher borrowing costs means more businesses will struggle to draw on debt funding to face challenges. Some companies managed to weather the worst of the pandemic only thanks to near-zero interest rates, government support and ample liquidity in credit markets.

“Companies are wrestling with how they secure supply chains in ever-tightening markets without raising prices or compromising sustainability targets, said Mr Hudson. “It is increasingly difficult to balance all these competing priorities — and hard choices inevitably lead to hard impacts. — Bloomberg/PA