Good morning, it's Paul here!

Please see the header above for the companies I shall be writing about today.


Carillion & trade credit insurance

The demise of Carillion on Monday this week is clearly still a very big issue at the moment. Watching the TV news last night, I hadn't realised just how extensive the company's reach is - managing so many areas of public services, e.g. prisons, school meals, etc. I found the TV news reporting alarmist, irresponsibly so. Employees should have been reassured by the media that most jobs would almost certainly continue, under new contracts. Instead, tens of thousands of people are now (probably unnecessarily) fearing for their livelihoods.

Quite a mess. The knock-on effect for suppliers who are now facing bad debts, is likely to be serious too. Indeed it could push some smaller, and/or financially weak suppliers, and subcontractors, into insolvency too.

A keyword search produces this list of listed companies which have issued RNSs concerning their exposure to Carillion. There will be more to come, no doubt. The longer it takes a company to comment, then I'd assume the bigger the potential problem.

This is a timely reminder that sales on credit are a gift, until the cash has been paid by the customer. Hence why it's so important for investors to check (as best we can) the quality of the receivables (also known as debtors) on the balance sheet, within the current assets section.

  •  Are those debtors actually collectable in full?
  • Is a company overly dependent on one or two big customers?
  • How solvent are its biggest companies?
  • Does the company insure its trade receivables? (they should do, where there is any doubt over customer solvency).
  • Is debtor days reasonable (anything over 60 days is an amber flag to me, over 90 days is a red flag). For UK companies, remember to adjust for VAT - i.e. revenues excludes VAT, whereas debtors includes VAT. So I would first divide debtors by 1.2 to take it from gross to net of VAT, and then calculate debtor days (there's a link above showing how to calculate debtor days).
  • Has trade credit insurance ever been withdrawn & caused disruption?

These are good questions to ask companies when we meet management. This can be an area of considerable risk, which many investors overlook. I like to hear an FD answering confidently, and in detail, when asked…

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