Companies to learn from

For a fifth year in a row, the London Stock Exchange Group acknowledged the 1000 UK companies that have outgrown their respective sectors and set a positive example for their peers

The latest edition of London Stock Exchange Group’s ‘1000 Companies to Inspire Britain’ list marked a jubilee of a kind for the initiative, as it was for a fifth straight year that the Group recognised some of the fastest growing and most dynamic small and medium-sized enterprises in the UK. Engaging the financial technology company DueDil to identify and audit all participating companies against key financial performance indicators and sector benchmarks, the LSEG published its 2018 report in May.

In order for a company to be considered for inclusion on the list, it must be active and registered in the UK. Businesses that have a parent incorporated in a foreign country are excluded, except for specific tax shelters. Companies that have been incorporated within the past three years are also excluded, and independent company or consolidated group revenues must be between £6 million and £250 million, if they are to be eligible.

To measure each company’s performance, DueDil calculates the average annual turnover growth over a three-year period, with calculations weighted to favour latest-year growth. It is noteworthy that any business with more than 20 per cent deterioration in net assets over the three-year period is ineligible to enter. Having compiled its list, DueDil then separates the eligible companies into their Standard Industrial Classification (SIC) groupings. Within each SIC sector, the companies are ranked by their individual growth rates, and those that have most outperformed their sector averages are singled out as the excelling businesses across the UK.

In his foreword to this year’s report, Mr. Nikhal Rathi, CEO of London Stock Exchange PLC, presented some of its key findings: “The service sector contributes 80 per cent of UK GDP, but our research paints an encouraging picture of diversity among the country’s fastest growing SMEs. The top five industries represented account for 40 per cent of the list, and the biggest industry by far is Engineering & Construction, followed by Information Technology,” Mr. Rathi explained. Indeed, 132 companies operating in the Engineering & Construction field were acclaimed for their achievements over a three-year period, while 72 IT businesses received the coveted praise from the reputable LSEG. The Food & Beverage, Financial services, and Building & Landscape industries were each represented by 65 companies, while 63 organisations trading in Retail earned a spot on the report.

Analysing the figures of this year’s list, Mr. Rathi dispelled, to a degree, the common belief that London and the South East are the traditional engines of British economic growth, stating that more than 60 per cent of the businesses listed are located outside that region. “Companies in the North West and the West Midlands also see the highest growth, with turnover increasing by more than two and three times the national average, respectively. This is against a strong national average of 71 per cent of turnover growth – similar to the 2016 figure and up from 50 per cent the year before.”

Further dissecting the demographics of the companies present on the report, Mr. Rathi pointed out that Edinburgh is one of the top ten cities for average turnover growth at 83 per cent, while Northern Ireland had its number of companies doubled on last year. “In Wales, innovative clinical healthcare providers operating across a multitude of cuttingedge health disciplines make up 15 per cent of the companies featured – three times the national average,” the CEO added.

With Brexit inevitably reshaping the business reality in the UK, Mr. Rathi continued his foreword discussing some of the issues that need to be addressed, making sure, however, that he broaches a number of subjects that have pre-dated Brexit that also need increased focus, in order for British companies to fulfil their potential.

“Brexit has highlighted many issues – from frictionless access to markets and movement of skilled labour to reducing trade barriers through appropriate and co-operative standards of international regulation – which businesses, together with UK and EU Governments, are working on, in order to ensure the continued economic well-being of all citizens. There have been some issues from earlier on, however, including ensuring dynamic SMEs can realise their potential and scale-up into the global leaders of tomorrow.”

According to Mr. Rathi, meeting this goal is linked to the presence of a healthy growth finance market that works for all companies and investors. “The vast majority of SME finance comes in the form of debt, which may not always be the right financing vehicle for start-ups that need to invest permanent capital in growing their business instead of servicing a loan every month.

“Overreliance on debt means too many entrepreneurs are scaling back their ambitions, rather than scaling up their businesses,” he went on, citing stats provided by the Bank of England, according to which a third of UK SMEs see themselves as having made too little investment across the range of funding options open to them. “More than a fifth of these businesses either ran into onerous collateral requirements or were unable to obtain funding for the duration they required, and these are all barriers unique to the debt market.”

LSE’s CEO maintained that equity growth finance is taxed several times over from capital gains tax to dividend tax, to stamp duty, and gave a positive example of equity investment being more fiscally viable and, therefore, prevalent in the economy of the USA, which results in the fact that 60 per cent of the world’s most valuable companies originate from America, while less than 15 per cent come from Europe – a considerable decline from 30 per cent a decade ago.

“Last year, the UK created a record number of start-ups and some studies estimate that just one per cent increase in the number of high-growth companies would drive an additional 238,000 jobs,” Mr. Rathi said, going on to praise the Government’s acute recognition when setting out its Industrial Strategy that more needs to be done to support innovative businesses to scale-up. “An economy that truly works for everyone should see capital flow bottom up to risk takers and entrepreneurs who create the jobs for tomorrow. We fully supported the Patient Capital Review and the £2.5 billion British Business Bank fund will ensure billions of extra pounds of vital investment flows into our dynamic SMEs,” he concluded

https://www.lseg.com/resources/1000-companies-inspire/2018-report-1000-companies-uk