Thomas Cook is one of the oldest travel agencies, but on September 23rd, 2019, it declared it had entered into liquidation and ceased operations. At the time its FHR was 17, Very High Risk. This came as an immediate shock for the travelers and tourists who were stranded. However, it was no surprise to the financial market and analysts closely following Thomas Cook’s fate - the financial risk and distress was evident as their financial position had deteriorated over the last several years.
FHR at default: 17, Very High Risk
So, what happened? At the very least, competition, changes in consumer buying patterns, and unfruitful M&A’s. Companies grow through innovation, organically and via M&A. M&A serves as a medium to drive synergies, bring portfolio and business diversity and help companies gain more market share and visibility. But it can also lead companies to over leverage and the expected synergies and profits fail to materialize.
Thomas Cook had gone through several ups and downs, organic growths, and M&A’s. It grew from a traditional travel agency to also include Airlines, Hotels, and Resorts, the current Thomas Cook Group.
In their latest results, released in May 2019 before liquidation, Thomas Cook had highlighted the challenges they were facing that were driving down their profits. They had to also take a significant write-off of Goodwill relating to the 2007 merger with MyTravel and were exploring alternatives to divest the airline group. There were subsequent recapitalization and takeover talks, but the discussions fell through as no consensus agreement was reached between the stakeholders, pushing Thomas Cook into liquidation.
What the ratings tell you.
Thomas Cook’s FHR had seen a significant decline in the last 3 years – from FHR 62 (Low Risk) at FYE 2017 to FHR 17 (Very High Risk) at Q2 FY2019. The decline in FHR signals need to investigate the change and take mitigation actions if needed.
Where our analysis tells the story
Diving deeper into the performance scores and resiliency (Table 2 – page 3 of the FHR Report) helps identify the problem areas. Thomas Cook showed weakening performance in the Operating Profitability and Net Profitability performance scores – this also aligns with the challenges that Thomas Cook had highlighted in its financial statements. Leverage, while not Weak, was still a concern as we will see noted in the Financial Dialogue. Earnings Performance, which determines a company’s ability to meet short-term internal and external obligations such as interest expenses, weakened as well. Liquidity continued to be weak, with depleting cash levels, which created additional stress on the short-term health.
Diving into individual financial line items, the balance sheet, income statement, and cash flow statement presented on the FHR Report provides further and in-depth context on the changes. The Peer Benchmark Report shows individual key ratios, and we can clearly see the deteriorated margins in the below table. It also shows that Thomas Cook was significantly under-performing its peers – certainly not a good sign.
The Financial Dialogue helps you identify the pertinent topics to discuss with a company when reviewing their financial health. This includes:
- Weak profit margins and liquidity – What led to the negative margins and what was Thomas Cook’s plan to improve their position?
- Concerning Debt leverage given weakening interest coverage – maturity schedule, who the debt holders are, and were covenants being met?
- Goodwill write-off as an abnormal item – what led to such a significant write-off?
Clients can download the full set of reports on Thomas Cook from our portal.