Against the current background of gloom, the Management Today profits league has registered its first serious fall since the early 1980s, and forecasters see little change by the end of 1991, writes Philip Beresford.
The party has abruptly ended for corporate Britain. While captains of industry lambast the Government for its failure to lick the curse of inflation, the news from their own neck of the woods is particularly grim.
Barely a day passes without news of dire warnings of difficult trading conditions from the chairman of an FT-SE 100 company. When Sir Denys Henderson, the ICI chairman, recently announced a 52% drop in first-quarter profits, the City actually marked the shares up, as much worse had been feared. At the same time bankruptcies and redundancies are running at record levels. Geoffrey Dicks, senior forecaster at the London Business School, is looking to a million job losses in 1991.
Against this background, the MT250 profits league table has registered its first serious fall since the dark days of 1980-81. The MT250, of course, measures the ability of companies to use their invested capital efficiently over the past year, by taking their net profit figure as a percentage of invested capital. This year we have omitted the normal 10-year growth league table, which we plan to publish separately in October.
The average score this year works out at 15.67%, against 15.94% in 1990. But the picture is not one of total doom and gloom. The pharmaceuticals and specialist chemicals industries have proved to be the star performers once again in Britain's manufacturing sector. Smith and Nephew, the pharmaceuticals group, emerges as the clear winner in the 250. SmithKline Beecham, Fisons and Glaxo also come out near the top.
Some of the better managed industrial conglomerates also do well, particularly the tightly run Williams Holdings, which raised its score from 26.5% to 38.7%. Similarly, Sir Owen Green's BTR managed a slight improvement to reach 35.5%. The one exception here is Hanson, whose score more than halved to just 15.3%. This highlights the group's need for a giant acquisition soon to set it on the growth path. Certainly Lords Hanson and White have the resources, following recent moves to strengthen their balance sheet. With a £17 billion war chest, City analysts reckon that Hanson could easily take over ICI, Hawker Siddeley, Pilkington and still have considerable loose change at the end of the day.
The worst performers have proved to be many of the builders and retailers, active in the '80s but now weighed down with debt as a result of ambitious takeovers. Beazer, the Bath-based building group which made a huge American acquisition, stands out as a candidate for the wooden spoon in this sector.
The water companies face a huge task to improve their performance. Many are embarking on large-scale investment programmes to upgrade their water treatment and sewage works. North West Water, with £1,583 million of invested capital, earned net profits of just £70.8 million, leading to a score in our league table of just 4.5%.
For Professor Roland Smith, chairman of British Aerospace, a perpetual headache is simply trying to make a decent return on his huge investment programme. BAe's £3.4 billion of invested capital resulted in a paltry £165 million net profit, and a score of just 4.8%. This is one reason the group has embarked on such a radical restructuring.
The decline in the MT250 profitability figure squares with other statistical evidence. Government figures for corporate profitability show a 2.3% decline in 1990 on 1989, while Datastream's sum total of the gross trading profits for the UK's industrial and commercial companies shows a drop from £72 billion in 1989 to £70.5 billion last year.
But what of the future? Much of the corporate plight came about as a result of company chairmen assuming that a period of uninterrupted growth would carry on unchecked. As a result they borrowed to the hilt to expand. In 1989 corporate debt stood at £24 billion. Last year it rose to £31 billion. By the end of 1991 the figure will be little changed.
Last year, in concluding our analysis of the MT250, we stated: "The jury is still out on whether Britain is about to enter a period of stagflation, with no growth and high inflation. If that does happen, next year's 250 results will make even grimmer reading." Clearly, with inflation still at the 6 to 7% level, and a negative growth rate of some 2 to 3% forecast for 1991, life is even grimmer than even the worst pessimist believed possible a year ago.