Updated research into the financial health of UK care home companies from Company Watch, specialists in tracking and predicting corporate financial health worldwide, confirms that despite some signs of improvement in the sector, almost a quarter of care home operators are in its ‘Warning Area’ six months on from its original study.
Company Watch looked at the finances of 5037 care home companies, which are responsible for most of the estimated 20,000 care homes operating in the UK.
From this sample, 1185 care home companies (23.5%) have a financial health rating – the Company Watch H-Score – of 25 or less out of a maximum of 100, compared to 1,449 (29.7%) six months ago, an improvement of 18% in the period. Over the past 15 years, companies in this Warning Area have had a 1 in 4 chance of needing a financial rescue of some type.
A cause of deep concern is that Company Watch also reports there are 682 care home ‘zombies’, which are companies with liabilities greater than their assets. Collectively, the zombie companies had a total negative net worth of £199 million. This has barely changed since last summer, when there were 693 zombies, owing a total of £217 million.
Most care home operators are smaller businesses. Company Watch found that the average UK care home company has total assets of £2.4 million, net worth of just over £1 million and borrows £784,000.
The average borrowing level of care home companies is 75% of their net assets. Gearing of this level is unusually high, reflecting the fact that the principal asset for most care home businesses is likely to be property. High levels of gearing make companies financially vulnerable to unbudgeted interest rate rises.
Most worrying of all, the average profit earned by a care home operator is a meagre £52,000, representing a tiny profit margin of just 0.5% when costs continue to rise and businesses with local authority sponsored residents remain under pressure to reduce fees.
On the brighter side, Company Watch noted that the average H-Score for the sector of 52 is significantly above that for the economy as a whole (between 43 and 44). This indicates a higher than average concentration of financially healthy care home operators.
There was an average of 32.5% companies in the Company Watch Upper Quartile with H-Scores over 75 out of 100, when the normal number would be expected to be nearer 25%.
Nick Hood, (above) business risk analyst at Company Watch, said: “The slight improvement in the financial health of the sector since last year is encouraging, but a business model which dictates 75% gearing and delivers a profit margin of less than 1% is simply not sustainable.
“We all know that local authorities cannot afford to pay higher fees and that the minimum wage is expected to rise by 3% in the autumn. When you add in rising energy costs and the strong likelihood of interest rate hikes in 2015, the first since 2008, this creates even more pressure on poorly performing homes.
“On this basis, it’s unclear how the sector can be expected to invest in sufficient extra capacity to meet the predicted major rise in demand to the 600,000 beds needed to cope with the ageing Baby Boomer generation.”