Sales optimism forced profit warnings, says report

A report published today by Ernst and Young has revealed that profit warnings were issued by 45 UK quoted companies in the last three months.

Factors cited by those surveyed included strong competitive pressures, rising costs and production problems, while three companies reported accounting difficulties.

And after issuing a profit warning the companies surveyed saw share prices fall by an average of 21% on the first day of trading following the announcement.

Those in the software and computer service sector generated the most warnings ? 22% (ten companies) ? during this quarter. The share price of these companies declined by an average of 31 per cent on the first day of trading following the warning being issued.

‘Software and computer service industry companies continue to report the most profit warnings due to the problems they are having forecasting demand,’ said E&Y partner Richard Coates.

The study highlighted that the key area of making computers Y2K compliant had almost disappeared. ‘These problems have been exacerbated by hiatus surrounding Y2K and the inherent difficulties in forecasting demand levels in the connected economy,’ added Coates.

In regional terms, London and South East-based companies accounted for 40% of the warnings issued, with 38% of these warnings coming from software and computer companies.

This was in sharp contrast to the Midlands and East Anglia, which has experienced the reverse, as the number of warnings, from a variety of sectors, doubled to 22%.

There were six warnings from companies in Scottish transport, energy and food production sectors. There were also marginal increases in the North West and North East.

The report gives an optimistic forecast for the economy for the rest of the year and while the strength of sterling has fallen, it remains a powerful force against the euro.

E&Y does not believe this has influenced profit warnings, which have already been issued this year, but this may change in the future.

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