Print Published 1st Oct 2012, 10:43

Stable balance sheets helped public groups through recession

The balance sheets of most publicly listed marketing groups appear to have remained fairly stable during 2011 despite the gloomy economic environment, according to the latest annual analysis of balance sheet vulnerability published today.

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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’ funds and then examined the extent to which those funds had been invested in acquisitions where the purchase price was 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 likely to be eroded by write-downs in the value attributed to past acquisitions.

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. 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 shows that 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.