5 red flags that could have saved you from the collapse at Carillion

Tuesday, Jan 16 2018 by
5 red flags that could have saved you from the collapse at Carillion

This time last year the construction and support services group Carillion was valued at £1.0 billion. Yet 12 months on, its equity is effectively worthless and liquidation beckons. It’s been a disastrous turn of events for what was one of Britain’s largest government contractors. But what were the red flags that could have warned you it was coming?

For shareholders in Carillion, most of the price destruction unfolded during 2017, but some had predicted problems long before that. For the past three years, shares in Carillion have been some of the most heavily shorted in the market. For bears, the group was guilty of getting its contract pricing wrong and racking up too much debt. Ultimately, that spiralling debt has been its undoing.

But could these problems have been anticipated? We’ve taken a look at the Carillion StockReport - a page packed with algorithmic insights into its finances - to see where the red flags were and how these warnings can help investors detect and avoid disasters like this…

1 - A High Bankruptcy Risk

Predicting a corporate bankruptcy isn’t easy, especially in a business that’s politically sensitive because it does so much public sector work. However, there are ways to assess bankruptcy risk, and one of them is to use the Z-Score, which was designed by finance professor, Edward Altman.

The Z-Score rates companies against a set of features that are commonly seen in firms that go bust. So while it’s not built to predict a bankruptcy, it does aim to measure how closely a company resembles other firms that have filed for bankruptcy in the past.


Carillion was in ‘Caution’ territory for much of 2017, but its half-year results at the end of September 2017 pushed it into the Distress Zone. It was then that the company’s already high debt levels increased substantially (see below). At that point, all four of the main checks were flagging as a risk, and this was a big warning that Carillion’s finances were deteriorating.


These sorts of accounting insights are just one click away on the Stockopedia StockReport.

2 - A Falling StockRank

There was a brief spell in the second half of 2016 when Carillion’s StockRank broke above 80. That put it in the top 20% of the market for its exposure to the three factors…

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As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested. ?>

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Carillion plc is an integrated support services company. The Company operates through four business segments: Support services, Public Private Partnership projects, Middle East construction services and Construction services (excluding the Middle East). The Support Services segment includes its facilities management, facilities services, energy services, rail services, road maintenance services, utilities services, remote site accommodation services and consultancy businesses in the United Kingdom, Canada and the Middle East. The Public Private Partnership projects segment invests in Public Private Partnership projects in the United Kingdom and Canada. The Middle East construction services segment includes its building and civil engineering activities in the Middle East and North Africa. The Construction services segment includes its the United Kingdom building, civil engineering and developments businesses, together with those of its construction activities in Canada. more »

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52 Comments on this Article show/hide all

timk 17th Jan '18 33 of 52

In reply to post #299343

Concur with chart of stockrank being valuable

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purpleski 17th Jan '18 34 of 52

In reply to post #299013

Hi Vik2001

I contacted the guys at Stockopedia and asked. They are basically working flat out on the new site and that being a small team and dont have the time to roll bits piecemeal, which I can understand.


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FREng 17th Jan '18 35 of 52

If fund managers were using Stockranks widely then they would stop giving us PI subscribers any edge.

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JohnEustace 17th Jan '18 36 of 52

In reply to post #300033

It depends on the extent to which our edge, assuming we have one, arises from the data or other factors.
It's a different game managing other people's money. John Rosier talks about this in his interview on PI World.

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FREng 17th Jan '18 37 of 52

In reply to post #300058


That's true, of course, but being better informed than the market must provide some advantage. That was the main message of Slater's Zulu Principle - and it is the main sales message of Stockopedia. It's just unfortunate that the more subscribers Stockopedia gets, the less advantage any individual has from being better informed!

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Edward Croft 17th Jan '18 38 of 52

In reply to post #300133

 It's just unfortunate that the more subscribers Stockopedia gets, the less advantage any individual has from being better informed!

I think this depends on 2 main interweaved factors :

  1. Are the Value / Momentum anomalies driven by behavioural factors?
  2. Are the markets dominated by discretionary decision making, or algorithmic decision making?

As long as #2 persists, and #1 is true, then factor investing should beat the market.  

Markets do get more efficient over time.   Like I said in my NAPS article, I think there will eventually be a shift to 80% passive/algorithmic and 20% active fund management.   We're seeing that shift primarily into index funds at the moment, but there's a long way to go. 

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FREng 17th Jan '18 39 of 52

In reply to post #300138


Thanks for that succinct and insightful response, which I shall want to think about in some depth.

My first reaction is that what Stockopedia offers - in addition to convenient access to data that is already available from other sources - is algorithmic analysis of that data. Yet you have shown that over recent time periods, those algorithms, combined as Stockranks, have beaten the market.

So are we wasting our time reading SCVR, when we could be trading algorithmically?


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belazela 17th Jan '18 40 of 52

Horrible situation.  Ludicrous how some fund managers hung on to the stock and made losses. So much for professional investors. I don't like small caps anyway.

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shipoffrogs 17th Jan '18 41 of 52

In reply to post #300138

"2. Are the markets dominated by discretionary decision making, or algorithmic decision making?

As long as #2 persists"

Which part of 2 is persisting? Discretionary or algorithmic decision making?

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shipoffrogs 17th Jan '18 42 of 52

Isn't the biggest red flag here the highly acquisitive approach of Carillion which bundles the risk into one entity? And isn't this a risk that the government and regulators should be paying more attention to?

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Andrew L 17th Jan '18 43 of 52

Ben - My own Red Flag warning system means I would never have looked at Carillion. I simply ignore low quality sectors and those with significant risks. It isn't rocket science to know that Carillion and companies like it could go bankrupt. Connaught went bankrupt in 2010. A recently floated AIM outsources (I forget the name) in which Mark Slater had a stake almost went bankrupt. The simplest way to do well and avoid mistakes is to have a sector wrapper to your investment approach. I.e. such as the SCVR ignoring resource stocks. The profit accounting for resource stocks is always incorrect but that is another story (the depreciation charge is historic and there is no way they can no the cost of a new mine). Contracting risk for construction companies has been well documented for sometime. It is a classic game theory type situation. They all compete for bids and eventually bid at too low a level. They also underestimate risks. A similar situation for the banking industry. In the case of Carillion they were paying clients when buildings weren't completed on time. How can you price that potential risk into a contract?

Builders who come around to fix your house up are generally worth avoiding. Builders listed on the stock market who build things under contract are also worth avoiding. Long-term contracts for construction are subject to significant risk with the building company typically taking on a lot of the risk. I.e. the whole thing is assumption based. As I am sure people are away the world assume is meant to have come from the Romans who made it out of three worlds: Ass U Me. I.e. when you assume you make an ass out of you and me!!!!! (apologies if any decency standards have been broken). Carillion's assumptions clearly made an ass of itself and its investors. The more assumptions in a company the more cautious you should be. The inherent reason why a focus on cashflow rather than profit has often tended to produce better results. The greater the difference the greater the assumptions tend to be!!!

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richardhutchinson 17th Jan '18 44 of 52

Great summary. As a small private investor I joined Stockopedia in November 2016 with a small holding in Carillion (LON:CLLN) at the time, mainly for the dividend. I picked up on some of points raised, but still held on thinking everything would be ok and it would turn around. When I saw the Stock Rank fall I decided to trust the system and sold despite the irrational / emotional connection.

Thanks to Stockpoedia I got out in March 2017, as a small investor access to this information is invaluable and persuading me to get out of Carillion has paid for my Stockopedia subscription for the next few years!

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marklucas8809 17th Jan '18 45 of 52

Great article! The graph of Stockrank history is illuminating. Is there now a way for subscribers to pull up the Stockrank history for any share?

What would be really interesting to me, would be overlaying share price and Stockrank history on the same chart. It would help establish if ranking is a good leading indicator of trouble. Also I'd love to look at shares that have gone on to perform well, to see if Stockranks historically can trigger sale signals. What you might call false positives.

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cig 18th Jan '18 46 of 52

In reply to post #300143

Stock picking is a fun hobby.

Beating a plain passive index is already hard, beating a quant strategy that does quite well (outside the US) is extraordinary.

Economically, stock picking is likely technically a waste of time for 95% of people: between those who have no edge whatsoever, those who have an edge but lose it to behavioural errors, and those who are nominally beating a reasonable benchmark but whose portfolio is too small to justify the time expended (net gain above benchmark below the opportunity cost of hours spent on the job priced at their marginal earning potential in their daytime job), there's probably very few people left.

Maybe it's just Paul who can do it for money. The rest of us just enjoy it (or are deluded).

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Andrew L 18th Jan '18 47 of 52

In reply to post #300403

cig - interesting points. I guess the very point of Stockopedia surely is to improve the odds for retail investors. The idea is essentially to select the best stocks from all stocks. This is as opposed to being sold to an idea.

Your general thesis has some validity. For example nearly all gamblers with bookmakers lose money but they still do it for the thrill. Retail investors have advantages but tend to succumb to psychological biases. Or just use a very simple approach that fails: Carillion has gone down therefore it must be cheaper and I will buy it.

I think your argument is well reasoned. Investment books tend to be titled "anyone can do it".. "you can be a stock market genius"... "how anyone can outperform" etc....The reality is that the authors tend to be extremely talented and assume that their skill set is nothing special. Or are trying to flog courses or books!!!

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Funderstruck 18th Jan '18 48 of 52

In reply to post #299083

When investing why put money into a firm where there are big questions about survival; I happened upon a detailed report over 18 months ago & heeded the advise as 'not investable' that saved me a lot of dosh & re emphasised for me in addition the Paul Scott advice to look at Debt & Pension schemes. There is much else in the PS. forensic reports that will help readers to reduce the losses. Commiserations to those who did lose £££ but DYOR as this team always emphasise.

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Lawman 18th Jan '18 49 of 52

Investors' Chronicle published an article on the importance of 'Free Cash Flow' and cited Carillion as an example of a weak company. This was subsequently proven correct.

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Andrew L 18th Jan '18 50 of 52

In reply to post #300738

Lawman - free cash flow isn't necessarily a great indicator. What if a company is spending heavily on assets to build up its business i.e. such as Dart Group. Construction companies can can cashflow towards the end of contracts. So it can be hard to gauge. The issue for Carillion appears to have been cost over runs, penalties due to late contract delivery and some customers not paying. These were essentially estimate and management issues. If Carillion had managed to deliver against its objectives then surely the cash would have come in.

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runthejoules 19th Jan '18 51 of 52

Would be great if there was a column, like SCVR, but for which companies are absolute dogs and are going to go down so we culd get ideas on which ones to possibly short!

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gus 1065 19th Jan '18 52 of 52

In reply to post #300858

I recall there used to be some more explicit comment in the SCVR about candidate shares for shorting but it was toned down/removed as it caused too much beef among subscribers. Human nature being what it is, no one likes to see their pet share (or employer for that matter) singled out as a prospective dog and any advocates for taking a short position usually received a pretty acrimonious reception. Likewise, “going short” still seems to carry the malodour of being a spivvy activity that nice investors don’t do. I think we’re pretty well served already with Paul and Graham’s commentary in that you can usually tell when they think a share is c**p (and thereby potentially worthy of a short).

If you want to generate explicit shorting ideas, take a look at the guru Shorting screens here or perhaps skip over to Short Interest Tracker (daily information on level of short interest above 0.5% in UK stocks - hopefully the pros have some idea of what they’re up to) or even the commentary from the likes of Evil Keneivel (on Master Investor) or Tom Winnifrith and friends (on Share Prophets). Robbie Burns/the Naked Trader’s bi-weekly blog also usually picks out a share or two that he is looking to go short on (currently short Devro (LON:DVO) as I recall - that should be worth a few red thumbs!).


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