Amber alert for firms at risk

GIVEN the problems that have beset groups such as Transfer Technology, Blenheim Exhibitions and Tiphook recently, the City is looking for a way of spotting companies that have the potential to run into trouble.

An analyst with a small research company believes he may have come up with a simple measure than would aid this process. It is called the Amber index and is a way of helping estimate the risk factor in a company's shares.

Richard Bernstein, a director of City Marketing Financial Analysis, calculates the simple measure by dividing a company's market capitalisation by its retained earnings, that is the profits that it has accumulated on its balance sheet after paying dividends.

A slightly more sophisticated version of the index has also been devised. In this the retained earnings figure is adjusted by Mr Bernstein to take account of matters such as brands on the balance sheet, goodwill written off and the like. The retained earnings figure gives an indication of the company's ability to pay dividends, though it is not an accurate accounting measure. The higher the resulting figure, the more the company has to be certain that its assets work for it because of the tighter margin for error. In the past, Mr Bernstein has identified Tiphook, Blenheim and TransTech as having high Ambers.

Mr Bernstein is now completing a thorough analysis of the entire FT-SE 100 giving their straight and adjusted Amber ratings. His FT-SE 100 analysis has thrown up 11 shares where the Amber is higher than 10 on an adjusted basis (see table). They include Ladbroke, Thorn EMI and Tomkins. All could be considered relatively risky with the exception of Zeneca, which has a high rating because it is a new company that has had little time to build up reserves.

Report available soon from City Marketing Financial Services. Tel: 071-600 8331; fax: 071-814 9301

----------------------------------------------------------------- GEMS ON THE AMBER INDEX ----------------------------------------------------------------- FT-SE 100 Initial Adjusted Market Reported Adjusted company Amber Amber cap pounds m retained retained index index at 24/11 profits profits Bowater 50+ 50+ 2,170 (439) (454) BAe 4.5 50+ 1,557 386 (364) Cadbury S 13.1 24.1 3,684 281 153 Enterpr Oil 5.7 50+ 2,236 389 (342) Guinness 14.6 50+ 8,694 603 138 Inchcape 50+ 50+ 2,630 (37) (93) Ladbroke 3.8 50+ 1,825 479 (50) Thorn EMI 50+ 50+ 3,803 (861) (861) TI Group 50+ 50+ 1,655 (469) (469) Tomkins 10.2 50+ 2,468 242 (504) Zeneca 50+ 50+ 7,078 82 82 ----------------------------------------------------------------- Source: City Marketing Financial Services -----------------------------------------------------------------