The 8 early warning signs the Plimsoll Model uses to flag corporate distress up to two years out
TL;DR: By the time a company makes the front page of the FT for the wrong reasons, the warning signs have usually been visible in its accounts for two or three years. The Plimsoll Model is built around eight specific financial signals that, when they appear together, reliably mark a business heading for distress. This guide explains what those signals are, what they looked like inside well-known corporate collapses, and how to read them in a set of accounts before the rest of the market catches on.
Carillion didn't fail overnight. Thomas Cook didn't either. Neither did Wilko, BHS, Patisserie Valerie or Bulb Energy. In every case, the financial fingerprints of distress were already in the public record, buried in the notes to the accounts, the working-capital movements, the divergence between reported profit and underlying cash flow.
The hard part is not finding the signals. The hard part is knowing which signals matter, in which combination, and at what point they tip a business from "having a tough year" to "structurally in trouble."
That is what the Plimsoll Model was built to do.
What the Plimsoll Model actually measures
The Plimsoll Model rates every company in an industry on the same ten financial measures and combines those scores into a single visual rating, from Strong at one end to Danger at the other. It is deliberately industry-relative: a 4% margin might be excellent in distribution and dangerously thin in branded consumer goods, so every company is benchmarked against its peers, not against an absolute number.
A Danger rating is not a prediction that a company will fail. It is a statement that the company's financial profile matches the historic profile of businesses that have failed. That's a meaningful distinction, and one that has held up across decades of UK corporate collapses.
Below are the eight early warning signs the model leans on hardest, and what they look like in real-world cases.
The 8 early warning signs
1. Sales growth that diverges from the industry
The first warning sign is rarely an absolute decline. It's a company growing more slowly than its peers, or growing fast while peers shrink, which can be just as suspicious.
In the years before its collapse, Wilko's sales growth had drifted persistently below the high-street average. Customers were quietly moving to discounters; revenue plateaued while costs didn't. The headline number, "sales broadly flat", concealed a structural loss of market share that, by the time the board acted, was already terminal.
What to watch for: a company that grows by less than half the industry rate for two consecutive years, or that posts top-line growth materially out of line with the rest of its peer group in either direction.
2. Margin erosion that becomes a trend, not a blip
A single weak year is noise. Two or three consecutive years of margin compression is signal. Operating margin is the cleanest place to look, it strips out financing and tax effects and shows whether the business is genuinely earning its keep on what it sells.
BHS is the textbook case. For roughly a decade before its collapse, its operating margin trended down almost every year. Management talked about turnaround plans. The numbers said otherwise.
What to watch for: a company whose operating margin is in its lowest quartile of peers and has fallen in each of the last three reporting years.
3. Profit that depends on one-offs
Look at the gap between operating profit and pre-tax profit. If it widens because of property disposals, intangible asset write-backs, or "exceptional" gains that suspiciously recur every year, the underlying trading business is probably weaker than the headline P&L suggests.
This was a visible pattern at Patisserie Valerie in the years before its accounting fraud was exposed: reported profit that didn't reconcile cleanly to operational cash flow, propped up by line items that didn't pass the sniff test on closer reading.
What to watch for: a profit line that improves year-on-year while operating cash flow stagnates or declines.
4. Gearing rising faster than retained earnings
Debt isn't the problem. Debt that grows faster than the equity backing it is the problem. The Plimsoll Model tracks gearing alongside interest cover, the ratio of operating profit to interest paid, because a moderately geared business with thinning interest cover is in a far more precarious position than a highly geared one with strong cover.
Carillion had been adding debt for years before its collapse, while interest cover deteriorated and the business funded dividends from borrowings rather than earnings. The shape of the balance sheet was deteriorating long before the share price reflected it.
What to watch for: gearing rising for two consecutive years and interest cover falling, the combination is far more dangerous than either signal alone.
5. Working capital under strain
This is the signal that arrives earliest. A business in trouble starts paying suppliers more slowly (creditor days rise), chasing customers harder (debtor days rise or fall sharply, depending on whether the business is selling discounted receivables), and letting stock build (inventory days rise).
You can see it in the Companies House filings before anyone tells the market. Thomas Cook's working-capital position deteriorated visibly for several years before its 2019 collapse, supplier payment terms stretched, prepaid bookings were spent on operating costs, and the cash conversion cycle widened.
What to watch for: creditor days rising materially while operating profit margin is falling. That combination almost always means a business is using its supply chain as a free overdraft.
6. Return on capital that drifts toward zero
Return on capital employed (ROCE) is the single best summary metric of whether a business is actually creating value. A business with falling ROCE is, in effect, becoming worse at what it does, generating less profit from each pound of capital tied up.
The Plimsoll Model treats persistent sub-industry ROCE as one of the heaviest weighted signals in the rating. A company that earns 3% on capital in an industry where peers earn 12% is, in the medium term, a value-destroying business, regardless of what its top-line growth looks like.
Made.com is a recent case study. Aggressive sales growth, no profit, and a ROCE that never approached a level that would justify the capital invested. The growth story masked the underlying economics until the funding markets stopped underwriting them.
7. Asset utilisation falling
Sales per pound of assets, sometimes called asset turnover, quietly reveals whether a business is efficient. A retailer with falling sales-to-assets is over-spaced. A manufacturer with falling sales-to-assets is over-tooled. Either way, the fixed cost base is starting to look heavier than the business that has to fund it.
This was the pattern at numerous casual-dining failures of the late 2010s and early 2020s. Aggressive site openings funded by debt, followed by a slow but unmistakeable decline in sales per square foot, a ratio that ultimately determined which chains survived and which didn't.
8. Cash flow that no longer follows profit
The final and most reliable warning sign is when the cash flow statement starts to tell a different story from the income statement. A healthy business turns each pound of operating profit into roughly a pound of operating cash flow over time. A business in trouble does not.
Bulb Energy is one of the cleanest examples in recent UK corporate history. Headline customer growth was spectacular. Reported sales were vast. Operating cash flow was negative and got worse every year. The Plimsoll profile, explosive growth, no profit, deteriorating cash, is one of the most predictive patterns in the entire model.
What to watch for: operating cash flow that is materially lower than operating profit for two consecutive years, with no benign explanation in the notes.
How the Plimsoll Model combines these signals
No single signal predicts failure. The Plimsoll Model's value is that it combines all ten of its underlying financial measures, the eight above plus pre-tax margin and solvency, and benchmarks each company against the rest of its industry in the same year. The output is a single rating that distils the noise into a clear position on the league table.
A Strong company is in the top quartile of its industry on the majority of measures.
A Danger company is in the bottom quartile on the majority of measures, and typically shows three or more of the patterns above in combination. Historically, businesses that sit in the Danger band for two consecutive Plimsoll Analyses are markedly more likely to be acquired, restructured, or fail outright within the following 24 months than companies in any other band.
That is the headline claim of the model, and it is the reason credit teams, M&A buyers, finance directors and procurement leaders use it.
What to do when you spot the signs
If a customer, supplier, competitor or acquisition target is showing several of these signals at once, the response depends on your relationship to them.
If they're a customer, review your credit exposure. The most expensive bad debts are the ones written by finance teams who didn't notice their largest account was already in trouble.
If they're a supplier, identify the alternatives now. Re-sourcing after a supplier failure costs many multiples of re-sourcing before it.
If they're a competitor, prepare to take their accounts. Customers of failing businesses move fast once the failure becomes visible, and the firms that move fastest capture the share.
If they're an acquisition target, the price should reflect the risk. The patterns above are rarely fully visible in management's pitch deck.
The point of the Plimsoll Model is not to predict every failure with certainty. It is to compress the financial diagnostics that matter into a single, comparable rating, so that the warning signs in a set of accounts are visible to you before they are visible to the rest of the market.
That is the difference between reading the news and reading the future.
FAQ
What is the Plimsoll Model?
The Plimsoll Model is a financial assessment system that rates every company in an industry on ten weighted measures of trading performance and financial strength, benchmarks them against their peers, and produces a single rating from Strong to Danger. It has been published since 1987 and is used by credit teams, acquirers, suppliers and competitors to identify companies in financial distress earlier than market signals would otherwise allow.
How early can the Plimsoll Model spot a company in trouble?
The model is designed to identify deteriorating financial profiles up to 24 months before failure, restructuring or distressed sale. The earliest signals, particularly working-capital strain and divergence between profit and cash flow, typically appear in the public accounts well before the company makes any announcement of difficulty.
What's the single biggest warning sign of a company in trouble?
There isn't one. The Plimsoll Model is explicitly built on the principle that no single ratio is reliable in isolation. The most predictive pattern is the combination of falling margins, rising gearing, and operating cash flow that materially undershoots reported profit, appearing together for two consecutive years.
Can a Danger-rated company recover?
Yes. A Danger rating describes a financial profile, not an inevitable outcome. Companies do recover, usually through a combination of cost reset, debt restructuring, asset disposals, or change of ownership. The rating is a probabilistic signal, not a verdict.
Where does Plimsoll get its data?
Plimsoll uses the most recent filed statutory accounts of every significant company in each industry, sourced from Companies House and equivalent jurisdictions. Industry analyses cover the leading 100 to 1,500 companies in each sector and are refreshed annually.
How can I see the Plimsoll rating for a specific company or sector?
Plimsoll publishes more than 200 UK industry analyses, each containing the full rating, the ten underlying scores, and the comparative ranking for every significant company in the sector. Sector reports and single-company profiles are available on request.
This guide refers to publicly known corporate collapses for illustration. The financial patterns described are those visible in the published accounts of those businesses; specific company ratings, where applied historically, are held in the relevant Plimsoll Industry Analysis. Data and methodology: Plimsoll Publishing, May 2026.