After years of macroeconomic shocks in the UK, finding growth can be a difficult task. Particularly in the current landscape, with insolvencies common and inflation still high. However, it is possible to find if you know where to look and have the right tools.
Today we’ll be explaining how and why Red Flag Alert measures growth with two of our talented Data Scientists, the team who were behind our exclusive 92% accurate scoring system. Bethany Ashberry covers the how, and Alex Hoole rcovers the why.
Growth, as defined by the OECD, signifies a 20% year-on-year increase in turnover. It's important to note that this isn't merely a nominal figure; it considers the impact of inflation. To help you identify growing companies, Red Flag Alert has devised a 0-100 growth score. Here's how it works in a nutshell.
To create this score, we analysed eight years' worth of financial data. We divided the companies into two categories: those that had demonstrated growth over two years and those with the potential to grow over the subsequent three to five years. Any companies failing to meet these criteria were placed in the control group. This segregation was the starting point of our scoring process.
Next, we further segmented these companies based on size, account type, behaviour, and similarities to others. This categorisation allowed us to conduct a multivariate analysis to identify key indicators of growth. Factors like asset levels, adherence to accounting practices, and liquidity ratios emerged as significant predictors. We ensured these factors were statistically unique and free from bias, eliminating redundant variables.
After determining the statistical significance of these factors, we assigned a weighted score to each, ranging from 0 to 100. The resulting bands were as follows:
Remarkably, companies falling into the "Very Likely to Grow" category consistently outperformed expectations. They achieved an average growth of 56%, far exceeding the 20% benchmark. In the "Likely to Grow" category, the average growth was around 30%. The "Unlikely to Grow" category saw only 10-20% of companies experiencing growth, with an average of 8%. Lastly, in the "Very Unlikely to Grow" category, companies displayed an average negative growth of -7%, failing to reach the 20% turnover growth.
The growth score takes multiple variables into account, making it a comprehensive growth predictor. But remember, while a high growth score typically indicates a strong likelihood of growth, it doesn't guarantee financial health. A company can be poised for growth and still face insolvency. Growth and financial stability are separate realms.
Previously, a high credit rating on Red Flag Alert often coincided with a high growth score. However, this isn't always the case. For large companies, it can be challenging to achieve a 20% annual turnover increase due to their sheer size. This doesn't equate to failure; it merely implies a different growth trajectory.
In summary, identifying growing businesses is crucial, and Red Flag Alert's growth score is an invaluable tool for this purpose. It goes beyond mere credit scores, considering factors like investment, debt, and borrowing activities. It stands as the sole software in the UK capable of predicting a company's growth potential before any investments are made, providing valuable insights for prospective investors.
With the current economic state of the UK, knowing which companies are on a growth trajectory is invaluable. It's not just about celebrating the established success stories; it's equally interesting to spotlight businesses facing financial challenges but still has the potential to grow.
Red Flag Alert's growth score is the key to unlocking these hidden opportunities. It provides a window into a company's potential beyond its current financial state. Understanding a business's growth potential can be a game-changer, allowing you to spot promising investments that others might have overlooked.
Financial data often reveals the businesses that could benefit from a little extra support. With the right investments, struggling companies can become robust, thriving enterprises. The growth score is your tool to uncover these diamonds in the rough.
Moreover, it's crucial to consider regional disparities in funding and growth. By examining growth by region, we can identify areas with untapped potential. For instance, London consistently shows the highest average growth, followed closely by Greater Manchester. However, there's a stark contrast in the funding allocated to these regions. London tends to receive more financial support, leaving other regions, like Manchester, at a disadvantage.
The concept of "levelling up" the North, a government initiative, becomes more tangible with the growth score. It allows for an in-depth analysis of what's happening on the ground, ensuring that promises are translated into real progress and regional disparities are addressed.
One distinguishing feature of the growth score is its divergence from a traditional business credit score. While large corporations may boast healthy credit ratings, achieving a high growth score is a different challenge. This highlights the uniqueness of this tool in spotting companies on the cusp of remarkable growth. It's a beacon for those smaller or less recognised companies that might not have the media presence or investments of their larger counterparts.
Many big corporations are often in the spotlight, making it relatively easy to predict their growth prospects. However, what about those smaller or lesser-known companies? What about those big businesses without substantial media coverage or investment backing? The growth score fills this void, offering a systematic way to uncover their growth potential.
The ability to identify and differentiate growing businesses is paramount. Red Flag Alert's growth score is not just a tool; it's a strategic advantage. It allows you to look beyond a company's current state and into its future, to find opportunities where others may not. Most importantly, it's your window into the world of uncharted growth, where even the smallest and quietest companies have the potential to shine.
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