Learning the lessons from Carillion - how to spot the next 'water-skier'

25 January, 2018

What went wrong at Carillion – and how can you protect yourself next time? Company Watch takes a look at the financial fundamentals which led to Carillion’s failure and shows ways to identify who could be next…

After weeks of speculation about its long-term viability, Carillion, Britain’s second-largest construction company and one of the government’s most important contractors, went into liquidation on 15 January 2018, putting thousands of jobs and pensions at risk.

Ultimately, its main lenders decided they were not willing or able to support the firm as it became apparent that with just £29m in the bank and contracts with wafer-thin profit margins, Carillion had no realistic prospect of trading its way out of £1.5bn in debt.

Analysis

Carillion Strengths and Weaknesses

When the June 2017 interims were published, on the back of profit warnings earlier in the summer, it was clear that Carillion’s position was desperate. The H-Score (which measures a company’s fundamental risk from 0 (weakest) to 100 (strongest)) plunged to 3 out of 100 and we were recommending that no credit should be extended to the firm.

However, several of our clients have told us that, using the drill-down analysis and quick experiment functionality of our system, they had already reduced their exposure to the company in the years prior to the profit collapse in the summer.

What the drill-down highlighted was that, although the H-Score, hovering around 30 in 2016, looked reasonable at first glance, clicking into the Strengths and Weaknesses profile showed an unhealthy dependence on continuing profits (shown by the line on the graph).

The Balance Sheet (as represented by the bars on the graph) had been extremely weak throughout, scoring less than 13 out of 100 for all years. The scores identified a Balance Sheet that was undercapitalised and reliant on debt finance and other liabilities (including a large pension deficit).

Even prior to any profit warning, the company’s liabilities substantially exceeded its tangible assets and 60% of these liabilities were Current (i.e. due within 12 months).

Using the experiment functionality, a quick ‘What-if?’ scenario on 2016 or any of the earlier year's results, showed that if Carillion’s profit margins slipped the profile quickly went into the Warning Area. In the event of course, the profits turned into a spectacular loss.

Beware the Water-skier

At Company Watch we’ve come to know this type of profile as the ‘Water-skier’ – as long as the profit boat is pulling the company along, everything is fine, but as soon as the profits disappear there is little to stop the company from sinking – and it can happen in a very short space of time.

Contact us to identify the water-skiers in your portfolio

We offer free training to all our clients, and are very happy to discuss with those of you who have not used our system how we can help.

Please contact us to find out more.