In the warning area: Retail and Construction stocks

The companies most in danger of failure on the FTSE 350 are clustered in the construction and retail sectors, according to the data firm Company Watch.

Using published accounts, Company Watch attempts to identify the health, or otherwise, of listed firms' balance sheets.

It rates firms according to how they minimise risks through the management of earnings and assets. The final calculation is called the "H-Score" which provides a rating of 0 (weak) to 100 (strong). Any company with an "H-Score" below 25 is considered to be in a "warning area".

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Since 1998 one in four companies which fell below an H-Score of 25 have either entered insolvency or faced a major restructuring.

The current "warning area" stocks on the FTSE 350 include the retailers Debenhams and Carpetright. In the construction sector they include Carillion and Travis Perkins.

The man behind the list, Nick Hood, admits that the data is "backward looking" in that company accounts can be up to 15 months old. But, speaking to Sharecast, he argued that the underlying financials of a company are often drowned out by the noise of the market: "Unfortunately the market takes into account things other than the bare numbers".

Blacks Leisure, the outdoors equipment firm, had been in the warning area for five years before eventually going into administration in December.

Hood believes the danger for investors is putting money into a firm on the basis of stock market movements without understanding the underlying issues facing a company. Mr Hood told Sharecast that there are broadly two things to watch out for.

The first is the "water skiing effect", where a company is being "pulled along" by profits without tucking money away for a difficult year.

The second, says Hood, is excessive dependence on short term debt.

Sharecast has compiled a list of the FTSE 350 companies currently with an H Score below 25 and those with a perfect score of 100.

We include their 12 month share price movement as of the close on Friday January 27th. It's just worth noting that financial stocks are not given an H Score because of the difficulty in assessing their balance sheets.

(You can see more Company Watch research at https://www.companywatch.net/)

WARNING AREA

Barrett Developments (+14%)

The Berkeley Group (+35%)

Booker Group (+27%)

Britvic (-26%)

Carillon (-16%)

Carpetright (-20%)

Dairy Crest Group (-19%)

De La Rue (+39%)

Debenhams (-1.32%)

G4S (+0.51%)

Grainger (-0.97%)

Halfords (-22%)

ITE Group (-9%)

Kesa Electricals (-45%)

Kier Group (+10%)

Rentokil Initial (-27%)

RPC Group (+41%)

Shire (+27%)

Travis Perkins (-14%)

Yule Catto (-12%)

8 risers, 12 fallers

PERFECT SCORE

African Barrick Gold (-3.75%)

Anglo American (-14%)

Anglo Pacific Group (-14%)

Antofagasta (-6%)

Ashmore Group (+3.5%)

AZ Electronic Materials SA (+2.41%)

BHP Billiton (-10%)

British Land (-5%)

Capital & Counties Properties (+27%)

Capital Shopping Centres Group (-11.5%)

Derwent London (+10%)

Edinburgh Dragon Trust (-3.74%)

EnQuest (-23.5%)

Eurasian Natural Resources Corp (-29%)

Exillon Energy (-36%)

Ferrexpo (-18%)

Fresnillo (+35%)

Gem Diamonds (-20%)

Great Portland Estates (flat)

Hansteen Holdings (-13%)

Hochschild Mining (+4.5%)

Impax Environmental Markets (-20%)

Kazakhmys (-24%)

Land Securities Group (+0.5%)

Randgold Resources (+50%)

Renishaw (-18%)

Rio Tinto (-13%)

Shaftesbury (+16%)

Soco International (-19%)

Victrex (-13%)

20 fallers, 9 risers, 1 flat

BS