Heed the Warning..

When you go on holiday in a plane, you would expect the pilots to look at the instrument panel and notice and act on any warning indicators, wouldn’t you? The objective being that you all arrive safely at your destination. So, you might expect the pilots of organisations, the Board and the executives, to do the same with their management information and key risk indicators, no?

One crucial indicator that analysts monitor is the Altman Z-score which tells you whether a company is likely to go bankrupt in the near future. It comprises a weighted average of five separate indicators and the resultant score indicates safety where it is over 2.99; 1.81 to 2.99 is a grey zone where you should look into which indicator is lowering the score; and less than 1.81 represents a high likelihood of bankruptcy.

Last week, the world’s oldest holiday firm went bust, leaving 600,000 tourists stranded and 21,000 worldwide employees without a job. Thomas Cook started out in 1841 with a trip for a group to go from Leicester to Loughborough to attend a Temperance meeting. It grew into a £7bn business with 11m customers, four airlines, three tour operators, and 200 hotels.

Thomas Cook’s huge debt is being slated as the main reason for the collapse, debt it had hanging around for 12 years or so, and that it either couldn’t or wouldn’t shake off. And this at a time when package holidays have been enjoying a boom, and with international tourism increasing hugely (and forecast to continue). So this was all down to how the company was being managed. No excuses.

Over the past 13 years, Thomas Cook’s Altman Z-score never got higher than 1.09, and had been as low as 0.57. If the Board and executives did look at it, it would be hard to understand why they didn’t act on it. Maybe, because it had been in the danger zone for so long, they thought they were somehow getting away with it, when in fact it was becoming more and more likely all the time.

Data sources: guru focus.com; the Economist; Wikipedia

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