Balance sheets of publicly listed UK marketing groups edging towards greater vulnerability

By: Fintellect Publishing Ltd
 
BLOCKLEY, U.K. - July 2, 2015 - PRLog -- Balance sheets of over 80% of publicly listed marketing companies had become more vulnerable at their latest accounting year end than one year previously, according to a financial research report published today.

The report, published by Marketing Services Financial Intelligence (www.fintellect.com/msfi) calculates a “vulnerability ratio” for each  company.  That ratio comprises two components: the  level of borrowings relative to shareholders’ funds and the level of intangible assets (like goodwill) derived from acquisitions.

As the report acknowledges, it is a broad brush approach, but quite an instructive one.  Indeed the report notes that, over the l1 years during which the annual survey had been conducted, nine companies that had drifted into the “vulnerability zone” with a vulnerability ratio of 2:1 or more had subsequently had to undergo a capital reorganisation and/or to raise more capital from shareholders, or had reduced debt by disposing of major subsidiaries, or had been sold or rescued by other companies.  A few had endured the ultimate humuliation of adminstration.

When the balance sheets were examined last year, seven of the 18 companies involved were in or near the vulnerability zone.   That number has risen to eight today, despite the absence of Aegis Group from the latest report after being taken over by Dentsu and despite the fact that most companies with historically high vulnerability ratios had taken steps to protect themselves..

The report describes how TV production and digital content provider Ten Alps continued to struggle under the burden of heavy debt and a deficiency of shareholders’ funds until it announced a £4.5 million capital raising exercise last month.

Companies with the least vulnerable balance sheets were dotDigital Group, M&C Saatchi, Tangent Communications and Creston.

“Amidst today’s more promising economic atmosphere there are signs of companies expanding again”, the report’s editor Bob Willott said.  “Bank borrowings are on the increase and it may not be long before the MSFI Vulnerability Ratio highlights marketing agencies whose growth ambitions have exceeded a prudent view of available resources.

“In almost every type of business it is necessary to underpin expansion with an adequate capital base – whether in shareholders’ funds or bank borrowings. Growth itself, whether organic or by acquisition, rarely generates sufficient cash quickly enough to fund the cash outlay, including the cost of additional working capital and the creation of an adequate infrastructure to cope. All of this is evidence enough that the MSFI Vulnerability Ratio is a measure worth monitoring.” Bob Willott said.

The MSFI Vulnerability Ratio examines first the ratio of a company’s debt to shareholders’ funds and then examines the extent to which those funds have been invested in acquisitions where the purchase price has been represented predominantly by intangible assets like goodwill.  The theory is that any highly borrowed company is inherently vulnerable, but that the position can be made worse if shareholders’ funds are exposed to possible write-downs in the value attributed to past acquisitions.  The MSFI Vulnerability Ratio therefore combines the debt/equity and intangible assets/equity ratios.

“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”, the report noted.  Apart from Ten Alps, none of the companies breached this ratio in their latest balance sheets.

In examining the vulnerability ratios derived from the latest balance sheets, the spotlight inevitably fell on Ten Alps and Ebiquity, both of which fell into the 2:1 vulnerability zone.

Ebiquity had been expanding its market reach internationally, relying on bank borrowings to do so.

Among companies edging towards the 2:1 ratio were Communisis and Parity Group.  Parity Group had been saddled with historical losses of £85 million that reduced shareholders’ equity to less than £9 million, leaving little headroom for an increase in bank borrowings.

At Communisis, £39 million of the cost of past acquisitions has in effect been financed by the group’s pension fund – that’s an even bigger contribution than the net £36 million that the banks were lending at the last balance sheet date, the report says.  Shareholders have provided a further £116 million of the funding – far more than anyone else – resulting in a seemingly healthy debt/equity ratio of 0.32:1.

“However, what would happen if some of the £176 million spent on past acquisitions and attributed to intangible assets like goodwill had to be written off because the newly acquired subsidiaries were not delivering the anticipated income streams?” the report asks.  “That is not a fanciful scenario: last year alone the group had to recognise a £21 million charge for impairment of goodwill.  That charge, when added to a further pension provision of £11 million, eroded £32 million from the capital base of the business provided by shareholders (equity).  It is hardly surprising that the group’s vulnerability ratio leapt up from 1.47:1 to 1.84:1.”

END

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Robert Willott
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Source:Fintellect Publishing Ltd
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Tags:MSFI, Fintellect, Balance sheet vulnerability
Industry:Financial, Marketing
Location:Blockley - Gloucestershire - England
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