Steer - The SIGNS WERE THERE: the clues for investors that a company is heading for a fall

THE SIGNS
WERE THERE

THE CLUES FOR INVESTORS THAT
A COMPANY IS HEADING FOR A FALL

TIM STEER

First published in Great Britain in 2018 by

Profile Books Ltd

3 Holford Yard

Bevin Way

London

WC1X 9HD

www.profilebooks.com

Copyright Tim Steer, 2018

Designed and typeset by

The moral right of the author has been asserted.

All rights reserved. Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored or introduced into a retrieval system, or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of both the copyright owner and the publisher of this book.

A CIP catalogue record for this book is available from the British Library.

ISBN 9781788160803

eISBN 9781782834625

For Andrea and Thomas

Introduction
The high cliff divers of Acapulco

PART 1 Abracadabra
How profits can be maximised by turning costs into assets

PART 2 Stock matters
How profits can be affected by stock value

PART 3 Promises and estimates
The difficulties with accruals

PART 4 Not so good
When goodwill goes bad

PART 5 Busy building less value
The acquisition addiction

PART 6 Never mind the width, feel the quality
Deteriorating assets

PART 7 Crunch
There is no ignoring bad debts

PART 8 Too cosy for comfort
Related party transactions

PART 9 Beware of conflict
When auditors get too close for comfort

PART 10 The trend is your friend
Financial analysis and the use of ratios

Conclusion
Diving lessons

This book is written for the many who invest on their own account or for others, but it celebrates the few who recognise the significance and importance of a companys financial statements. Of all the people I know, those who count among the few are listed below and include those who have been an inspiration to me. All have enquiring minds and have sought answers to difficult questions. Many have done the right thing in difficult circumstances and in some cases at a cost to themselves. On behalf of all investors I would like to thank them for their vigilance.

Adrian Frost

Adrian Gosden

Alan Brierley

Alan Miller

Alistair Currie

Alistair Osborne

Andrew Jackson

Andy Bamford

Andy Brough

Angus Cockburn

Ashton Bradbury

Barney Randle

Bruce Davidson

Charles Lambert

Chris Bamberry

Daud Khan

David Bamber

David Hellier

David Toms

Derek Stuart

Emma Mercer

Eric Tracey

Euan Lovett-Turner

Evie Bowyer

Frank Field

Frank Manduca

Gavin James

Gavin Oram

George Godber

George Luckcraft

Gerald Khoo

Harald Hendrikse

Harry Nimmo

Henry Dixon

Howard Seymour

Howard Shilit

Iain Dey

Jacob de Tusch-Lec

James Quinn

Joe Brent

John Collingridge

John Waples

Jon Lewis

Judy Groves

Katharine Wynne

Kean Marden

Keith Cochrane

Kevin Ashton

Leo Quinn

Louise Armitstead

Mal Patel

Margaret Young

Mark Tyndall

Martin Green

Martin Hughes

Mary Hardy

Matthew Earle

Matthew Groves

Max Dolding

Michael Donnelly

Mike Geering

Mike Unsworth

Miles Costello

Natasha Landell-Mills

Neil Blackley

Neil Hermon

Neil Roberts

Nigel Ridge

Nigel Thomas

Oliver Shah

Paul Morland

Peter Davies

Peter Dickinson

Peter Smedley

Phil Bentley

Phil Oakley

Quintin Price

Richard Dale

Richard Findlater

Richard Fletcher

Richard King

Richard Leonard

Richard Plackett

Roger Hardman

Rosemary Banyard

Rupert Soames

Ruth Keattch

Simon Cawkwell

Sir David Tweedie

Stephen Liechti

Stephen Yiu

Terry Smith

Tim Good

Wes McCoy

Will Lewis

William Tamworth

THE HIGH CLIFF DIVERS OF ACAPULCO

Company share price disasters are like the plunges made by the famous high cliff divers of Acapulco. This is because the 135-feet dives that these brave men make from the cliffs of La Quebrada into the shallow waters below resemble what the share prices of companies do when they go spectacularly wrong. However, among the high cliff divers of Acapulco, there has never been a casualty, whereas a precipitous drop or even a more drawn out extended swallow dive in a companys share price may well result in it going bust, with shareholders, employees, suppliers, bankers, auditors and now, increasingly, even regulators caught by the shock waves. Some companies do of course recover, often with new management at the helm, but even then the fall-out for shareholders and other stakeholders following the share price collapse can be severe.

For all the companies featured in this book, the dives in the share prices and the company disasters that resulted in bankruptcy could have been predicted by little more than a browse through the annual reports or prospectuses if you knew where to look. But it seems that many of the great and the good in the world of investing do not bother to look at these important documents, and blame the auditors and increasingly the regulators when things go wrong. But the warning signs are regularly there, in the form of accounting shenanigans or other clear signs that a business is changing direction for the worse, or that excellent results are being reported only because of one-off and non-recurring items. Often these red flags are either not seen or are ignored by investors and other stakeholders.

The collapse in January 2018 of Carillion, which had received enormous amounts of public money as one of the UK governments favourite construction and support services companies, is just one in a long line of corporate disasters where even a cursory look at the balance sheet by anyone with a smattering of financial training would have evoked a feeling of dj vu and the realisation that the company was heading for a fall. Of course, not all share price disasters can be predicted by reading the annual report of a company, but it is a start and, with a little bit of knowledge, issues can be identified and a potentially loss-making decision avoided. This book is aimed at helping investors see the signs that there may be trouble ahead.

When looking at annual reports, always consider the Iceberg Principle. An annual report should be seen as an iceberg in terms of the information it contains. It cannot tell you all you need to know about a company, but if there is something in it that makes you feel uneasy, there may well be other even more uncomfortable things lying below the metaphorical water line. And that is often reason enough to sell the shares if you have a holding in the company, or to avoid it if you have not.

This book contains twenty-two stories about companies that suffered dramatic falls in their share prices. Some survived the fall, some did not. But in the cases of twenty of these companies there were clear signs in their annual reports that all was not well, and in the initial public offering (IPO) prospectuses of the other two companies, there were items that should have raised a quizzical eyebrow or two among potential investors. Although around half of the companies featured in this book got to grips with their problems and survived, thanks to the efforts and strategy of new management, the others did not.