The worst cases in the previous year’s survey have now either succumbed to the attention of administrators – notably Media Square and Adventis Group - or have restructured their capital onto a more prudent basis like Progressive Digital Media Group. Very few companies are still showing signs of potential stress.
The analysis looked first at the ratio of debt to shareholders’
The MSFI vulnerability ratio therefore combines the debt/equity and intangible assets/equity ratios. “We would regard a vulnerability ratio of 1.5:1 or less as prudent while a ratio materially in excess of 2:1 might be more likely to raise eyebrows”, explained editor Bob Willott. “Of the two measures, the debt/equity ratio is of greatest importance in that lenders tend to get very twitchy if the ratio exceeds 1:1 irrespective of the amount invested in intangible assets. By comparison, and in the absence of heavy debt, the risks attaching to large-scale investments in intangible assets tend to be of a longer term nature.”
At the last balance sheet date, only loss-making Ten Alps had moved into the danger zone where borrowings were close to or above the level of funds invested by shareholders. In response the company has since restructured its capital with the help of one of its major shareholders Herald Investment Trust. Additional share capital has been raised and loans have been reduced.
“The evidence of the past eight years has given objective validation of the measurement criteria we use”, Willott said. “All those companies that had a vulnerability ratio materially in excess of 2:1 have subsequently had to undergo a capital reorganisation and/or to raise more capital from shareholders, or have reduced debt by disposing of major subsidiaries, or have been sold to or rescued by other companies, or in extremis have gone into administration.”
According to the research criteria, two companies reduced their vulnerability below the “amber” warning ratio of 1.5:1. They were Hasgrove and The Mission Marketing Group.
“After a period of disappointing results, Hasgrove disposed of its loss-making Interel public affairs business to the management for £9.25 million and its balance sheet has benefitted considerably”
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Further information from:
Robert Willott (editor), Marketing Services Financial Intelligence.
Tel: 01386 700361. Mobile 07887 943697. Email: