Ten-year low for profit warnings a false dawn, warns Ernst & Young

THE worst of the corporate crisis may yet lie in store despite a sharp fall in profit warnings in the first three months of this year, accountancy firm Ernst & Young warns today.

There were 54 profit warnings in the first quarter, the lowest figure in ten years for the first quarter, which is traditionally the annual peak period for profit warnings.

This year's first-quarter total was up slightly from the final three months of 2009 but less than half the number in the corresponding period last year.

Yet the firm warns that the crisis in the UK corporate sector is far from over, with low interest rates creating a temporarily favourable corporate credit environment that may quickly evaporate once rates rise again.

Ernst & Young warns that low interest rates – along with a "vast" amount of corporate debt due to be refinanced over the next 12-24 months – mean that "even if earnings start to recover, we have not seen the worst of the impact of the crisis in the corporate market".

The report says just one profit warning was issued in Scotland in the first quarter. But Colin Dempster, restructuring partner at Ernst & Young, queries the relevance of the figure.

He says: "On paper, this figure may indicate that Scottish businesses are perhaps recovering more strongly. However, many Scottish PLCs are headquartered outside of the country. Whilst the profit warning may not have been recorded in Scotland, the reality is that Scottish plcs still face the same uncertain road ahead as their UK counterparts."

The low number of profit warnings should be viewed in the context of low expectations, the report cautions, with most companies producing conservative profit forecasts over the past two years. And as the UK government stimulus supporting the private sector is withdrawn, the recovery may prove less durable than the low number of profit warnings suggests, Dempster claims.

He adds: "Companies still need to be watching their backs due to the very real chance that growth will stall, while also planning for the eventual recovery."

Scottish companies may also come under increased pressure from HM Revenue & Customs as it takes a more proactive approach to tax recovery. It has allowed some Scottish firms to spread overdue tax payments through "Time to Pay" agreements, but Dempster predicted that its largesse could prove short-lived as UK government spending declines.