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Stylised Facts on UK Corporate Financial Health: Evidence from Micro-data
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(Issue 8, June 2000)

When firms fail, their creditors usually suffer losses, so anything which increases the likelihood of corporate failure can heighten the risks faced by the banking system. Past studies of corporate distress have established that profitability, gearing and liquidity are important to the chances of company survival. This article looks at the published accounts of over 1000 companies in each year between 1974 and 1998 to investigate how these indicators of financial health changed. It finds that the variation across companies in profitability and margins increased sharply from 1994 and in capital gearing from 1995. Despite the broadly favourable outlook for the corporate sector as a whole, the least profitable companies in 1998 were much less profitable than even the least profitable companies in the recessions of the early 1980s and 1990s. Similarly, the capital gearing of the most highly geared companies reached levels in 1998 not seen in the past quarter-century. These results imply that the downside risks facing creditors of the corporate sector may have been greater in recent years than suggested by aggregate corporate performance alone.

Key Resources

Memorandum of Understanding between HM Treasury, the Bank of England and the Financial Services Authority Download PDF (50k)