Could a quarter point rise in interest rates be the straw that breaks the camelís back

Coinciding with the recent hike in interest rates and amid concerns that levels of borrowing are escalating, a new analysis by industry specialists Plimsoll Publishing has looked at how high levels of debt are impacting on the financial health of the top 1000 Employment Agencies companies.

It found that 471 of the 1000 companies analysed are in fact, in more debt now than they have been in the last four years. Using other peopleís money to finance your company is, it seems, an increasing trend.

David Pattison, head of research at Plimsoll, commented. ìWe are always surprised how no one at these companies seems to realise their debts are rising and the effect itís having on the overall financial strength of the company. Unfortunately itís not something they tend to measure until itís too late. Our analysis spots these problems earlierî.

The Plimsoll analysis points to the 98 companies amongst the 471 where the debts are already impacting on their business and their competitiveness. Early warning signs include:

1) Warning signs are often present up to 2 years before the debt problem becomes serious. Companies tend to swap short term debt for long term debt. This has little effect on the companies overall financial strength, particularly if the debts keep rising. Itís often a sign that the banks are concerned and are looking for more security. 38 such companies are named in the Plimsoll analysis.

2) As the debt increases the companyís profitability will start to erode. Interest payments can in extreme cases, absorb all the profits. With rates rising, this will put further pressure on profitability. For 32 employment agencies companies, high interest payments alone have already tipped them into loss.

3) As this starts to take effect the company will push for extra growth. This puts further pressure on profitability, requiring extra working capital which frankly just encourages even more debt. At the 471 companies with high debts growth was good for 38 companies, seeing sales increase in the year.

4) However, if these debts are allowed to go unchecked, any disturbance to the business could end in disaster. The loss of a key client, a large bad debt and even increases in interest rates could be the straw that breaks the camelís back.

The full publication contains an individual profile for each of the largest 1000 employment agencies companies. Aimed at non accountants, it simplifies the key performance measures and uses a series of graphs to plot load lines. These conclusive charts give both non-financial and financial readers a visual summary of each of the companies in the market.

Copies of the analysis are available for 350 by calling 01642 626400, or email via c.sherwood@plimsoll.co.uk . Readers can request a 5% discount.