By Allan Kearns and John Whitley of the Bank's Domestic Finance Division.
This article looks at the information content of profit warnings issued by UK private non-financial companies over the period 1997-2001 in relation to measures of their profitability and balance-sheet strength. It finds that profit warnings are associated with a persistent fall in profit margins and that this decline in margins is larger than for companies who do not issue warnings. The article also finds that profit warnings contain incremental information for other balance-sheet variables: those firms who issue warnings are also more likely to see their gearing levels rise, and investment and dividends fall, than other firms whose profit margins also fall but who do not issue a warning.
The balance-sheet information content of UK company profit warnings