Death of Profit Margins Seen in Q2 2011 – Deloitte
An end to the rise of profit margins has been seen in the previous quarter resulting in the steep downfall of confidence among finance executives of many UK companies who expected a double-dip recession according to a survey conducted by Deloitte.
The dent in confidence of these executives is said to come close to the scale felt during the recession in 2008 when major banks in UK were shaken to their core, including the Lehman Brothers, Merill Lynch, Royal Bank of Scotland, Hallifax Bank, among others.
According to Deloitte, UK-focused companies are left with no other option but to cut costs and increase cash flow, whereas large exporters focus on expansion. Respondents to the survey included 131 chief financial officers of 34 FTSE 100 and 44 FTSE 250 companies. The others were CFOs of other U.K. listed companies, large private companies and U.K. subsidiaries of major companies listed overseas.
Last week, the Office for National Statistics showed a 0.8 percent decline in UK economy last quarter compared with the same period in 2010. The fall was said to be 1.5 percent lower than what has been recorded in the previous quarter according to ONS.
“The continued squeeze on U.K. consumer spending power seems to be weighing on corporate sentiment. Over the last year, real disposable incomes have fallen by 2.7%, the fastest rate of decline since 1976,” Deloitte Vice Chairman Margaret Ewing said.
“The mood of caution is reflected in a tilt in the balance sheet strategies employed by finance chiefs. CFOs are placing more emphasis on cost control and increasing cash flow than at any time in the last year,” Ewing added.
Deloitte chief economist Ian Stewart emphasized the bleak expectation for corporate revenues in the next 1 months whereas last year there was optimistic anticipation for profit margins.
“A year ago, the dominant view among CFOs was that profit margins were on the rise. Today, the balance of opinion is that margins are set to narrow. CFOs believe that the period of strong growth in profit margins is drawing to an end,” Stewart said.
Nonetheless, financial officers remain willing to take the risks associated with their balance sheets.
Stewart said “risk appetite remains close to the three and a half year high seen last quarter, which seems to reflect the strength of corporate balance sheets, the availability of capital at a relatively low cost and, a perception that, while uncertainties abound, the current environment also presents opportunities for profitable growth.”
“Strong corporate balance sheets and good financing conditions mean that many CFOs are continuing to look for opportunities for expansion. This quarter’s survey suggests that CFOs see many of those opportunities lying overseas,” Stewart said.
Finance officers are said to prioritize the introduction of new products and services, or expanding into new markets, expansion through acquisitions, and raising capital expenditure.
Companies that derive a high proportion of their revenues from overseas had a higher level of risk appetite and were pursuing more expansionary strategies than their UK-facing counterparts, Deloitte said.