Northern Foods, the ready-meals maker, today said that the rising cost of making biscuits and the relentless pressure from supermarkets to cut prices was dragging on group profits.

However, the company, which counts Marks & Spencer as its largest client, said that profits rose to £40 million in the year to March 31, from £33 million the year before, excluding businesses it sold during the year.

The company has disposed of some 40 per cent of its business over the past year.

Group losses widened to £22.5 million in the period, from a £5 million loss the year before, once the costs of the sell-off are included.

The firm’s operating margin dropped to 6.6 per cent, from 6.8 per cent, hit by higher raw material costs and large supermarkets squeezing suppliers to keep down prices.

The Leeds-based company said that rising raw material costs were causing problems for its biscuits business.

Jez Malden, the finance director, said: "You are looking at a £4-5 million impact”.

The results come after Pat O'Driscoll stepped down as chief executive in February, having failed in her attempt to drive a recovery in the group's fortunes.

Stefan Barden, her replacement, said that the company would not sell its biscuits unit, in spite of speculation that it would do so.

“We plan to keep the business. Clearly, if someone came in with an extremely high offer we would consider it but we see it as a profit opportunity for ourselves," he said.

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