Carillion Bankruptcy: Financial Statement Analysis
This paper conducts a comprehensive financial statement analysis of Carillion, the British construction and facilities management company that collapsed into bankruptcy in January 2018. Using horizontal, vertical, and ratio analyses alongside the Altman Z-score, the paper examines three core questions: how liquidity deteriorated, how management decisions contributed to the company's failure, and what the financial statements reveal about overall performance. Drawing on Carillion's published financial statements from 2015 through mid-2017, the analysis traces a pattern of slim margins, high leverage, and inadequate risk disclosure that left the company fatally exposed to bad debts incurred on Middle Eastern contracts. The paper concludes that Carillion's collapse was driven by both structural financial weakness and managerial incompetence.
- Introduction: Research questions and purpose of financial autopsy
- Data Collection and Methodology: Sources, analysis types, and Altman Z-score explained
- Solvency and Liquidity Ratios: Current ratio decline and debt-to-equity deterioration
- Asset Utilization and Profitability Ratios: Receivables write-down and profitability collapse
- Horizontal, Vertical, and Altman Z-Score Analysis: Z-score signals distress; management response assessed
- Conclusion: Structural weakness and managerial incompetence drove collapse
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What makes this paper effective
- The paper frames its analysis around three concrete research questions—liquidity, management quality, and overall performance—giving the reader a clear roadmap and ensuring every analytical technique connects back to a stated purpose.
- It integrates multiple analytical methods (ratio, horizontal, vertical, and Altman Z-score) in a logical sequence, with each layer reinforcing or contextualizing the previous one, rather than treating them as isolated checklists.
- The conclusion synthesizes quantitative findings into a qualitative judgment about managerial incompetence, demonstrating the ability to move from data interpretation to informed argument.
Key academic technique demonstrated
The paper exemplifies convergent financial analysis: deploying several distinct analytical lenses on the same dataset and showing how their results corroborate one another. For instance, the deteriorating current ratio, the negative Altman Z-score, and the billion-pound write-down are independently derived but mutually reinforcing signals. This triangulation approach strengthens the credibility of the conclusions and is a hallmark of rigorous financial case analysis.
Structure breakdown
The paper opens with an introduction that states its three research questions, then explains data sources and methodology before moving into the analysis itself. The analytical sections proceed from solvency and liquidity ratios to asset utilization and profitability, then to horizontal, vertical, and Z-score analysis. A concluding section draws management lessons from the quantitative findings. An appendix provides the full financial statement data used throughout. This structure—question, method, evidence, interpretation, conclusion—mirrors a standard research paper format appropriate for an undergraduate finance course.
Introduction
Carillion was a construction and facilities management company that went bankrupt in January 2018 after experiencing severe financial difficulties throughout 2017. This paper analyzes the company's financial statements in order to examine that bankruptcy — specifically, to apply financial statement analysis techniques to ascertain what went wrong with Carillion and how it ended up in liquidation.
Three key questions guide this analysis. The first is how liquidity affected the company. Bankruptcy typically arises from a liquidity crisis, so this analysis investigates the structure of Carillion's liquidity issues and attempts to determine whether warning signs existed prior to 2017, or whether management's response to the crisis was inadequate. The second question concerns the effect of poor management on the company's financial health. Carillion continued to acquire building contracts throughout its decline; its failure was not for lack of new business. The third question involves an assessment of the company's overall financial performance.
By investigating these three elements, this report utilizes financial statement analysis techniques — including horizontal, vertical, and ratio analyses — to conduct what amounts to a financial autopsy of the Carillion bankruptcy.
Data Collection and Methodology
Carillion's financial statements are a matter of public record. The data was gathered from the Financial Times website, though many other public sources exist. Background information about the bankruptcy and the circumstances surrounding it was gathered from financial news sites. As this was a high-profile corporate bankruptcy, it received extensive coverage in the business press, providing useful context for interpreting the financial statements.
Carillion's balance sheets and income statements for the period 2015–2018 can be found in Appendix A.
Carillion's bankruptcy was analyzed using common, established techniques for financial statement analysis. Financial statements for publicly traded companies are produced in a standardized manner, which allows for comparability across years and across industries. This standardization also enables the development of analytical techniques — systematic means of breaking down the components of a company's financial statements. The three major types of analysis are horizontal analysis, vertical analysis, and financial ratio analysis.
Horizontal analysis compares the performance of the company against a baseline — typically the first year of data. In this analysis, June 30, 2015 forms the baseline. Horizontal analysis can reveal patterns such as expenses growing faster than revenues, precisely because figures are normalized at the starting point.
Vertical analysis examines the relationship of individual financial statement line items to one another. The baseline differs by statement: for the income statement, it is total revenue; for the balance sheet, it is total assets. Vertical analysis is particularly valuable when comparing companies within the same industry, or when tracking a single company across multiple periods. For example, it might reveal that accounts receivable as a percentage of revenue increased dramatically, signaling a higher risk of bad debts.
Financial ratio analysis relies on standardized ratios constructed from line items common to most financial statements. These ratios are comparable across companies in the same industry or within the same company over time. Ratios are typically grouped into categories such as solvency, liquidity, operating performance, investment returns, and margins.
An additional metric worth highlighting is the Altman Z-score, which is typically used to assess bankruptcy risk. Carillion's management would have been aware of the company's Z-score, so it is worth exploring what that score was at different points in time and analyzing management's response — this will shed light on whether management reacted appropriately to the financial risks the company was facing. The Altman Z-score incorporates measures of working capital, retained earnings, and other line items drawn from the financial statements.
Using these different metrics made it possible to answer each of the research questions. Liquidity is measured by both the financial ratios and the Z-score, which together help determine when the company tipped into liquidity risk and how it responded. Management performance is assessed by examining what signals were available and what actions — or inactions — followed. Overall company performance is addressed through the full suite of financial statement analyses.
Solvency and Liquidity Ratios
Solvency ratios measure a company's ability to remain solvent in the short run. When these ratios deteriorate into a zone of concern, fairly drastic action is required to shore up cash flow. The fact that Carillion went bankrupt indicates that its solvency ratios had slipped to a point of no return. The rule of thumb is that the current ratio — current assets divided by current liabilities — should remain above 1.0, enabling the company to liquidate current assets to meet near-term obligations. Carillion maintained a relatively stable current ratio above 1.0 through the end of 2016. By mid-2017, it had dropped to 0.74, a significant decline in a short period, though not yet an irreversible position on its own.
The quick ratio and cash ratio tell a similar story: stable levels through 2016, followed by a sharp drop in the first half of 2017. The company's financial problems did not become public until July 2017, when it faced payment difficulties on Middle Eastern contracts and was spending more than it could sustain given declining revenues. It began taking on additional debt and developed a pension funding shortfall. While the inability to finance ongoing operations was not yet apparent at the end of June 2017, it became evident in the months that followed (Detrick, 2018).
The emergence of a pension shortfall suggests that liquidity ratios might have offered earlier warnings. Liquidity ratios examine the alignment of longer-term assets and liabilities. A key measure is the total debt ratio. At the end of June 2016, this stood at 0.77 — a level that had been stable for several years. One year later, it had risen to 1.12, indicating that the company was borrowing to finance its operations.
The debt-to-equity ratio tells an even more alarming story. Carillion had maintained a debt-to-equity ratio of around 3.0 for several years, but this rose to 5.32 by the end of 2016 and then collapsed to –9.42 by June 2017. Historically, a capital structure that was roughly three-quarters debt might seem manageable for a company with a large fixed asset base, but it left Carillion with little cushion to absorb financial shocks. While construction can be a relatively stable business — particularly in Carillion's primary markets of the UK and Canada — the Middle East market operates differently, and payment reliability is lower. This proved to be the company's undoing. As it continued spending on major projects while customers failed to pay, Carillion suffered operating losses that eroded all equity value, pushing retained earnings into negative territory. The value of its debt exceeded the value of its entire asset base — a position that is generally unsustainable without either a fresh equity injection or strongly positive free cash flow.
Conclusion
Carillion's bankruptcy highlights several important lessons. First, there are real limitations to the use of financial statements as predictors of financial risk. In Carillion's case, the severity of the impending crisis was not evident in the financial statements, nor was it given any meaningful prominence in the company's annual report. Just six months before a massive write-down devastated the business, the published accounts gave little indication of what was coming.
That said, it is clear from the financial statements and from the various forms of analysis applied here that Carillion was only of modest financial standing even before the write-down in early 2017. The company was large but carried slim margins and an uninspiring income statement. Its heavy debt load made it structurally more vulnerable than a less leveraged firm would have been to any operational disruption. The Altman Z-score is the clearest pre-crisis indicator that financial health was not strong — but the rapid deterioration that followed was ultimately the result of management acknowledging, far later than it should have, that large sums owed to the company would never be recovered.
This points to managerial failure on multiple levels. The company's financial condition, while not catastrophic, was not robust enough to withstand a significant negative shock. Carillion might well have avoided that shock had it limited itself to operations in the UK and Canada — markets where it had a track record and where payment risk was manageable. Instead, it pursued high-profile growth projects in the Middle East without, apparently, adequately understanding or pricing in the risks of doing business in those markets. As a result, it exposed its underlying vulnerabilities in the worst possible way, ultimately sending the company into liquidation.
Furthermore, the absence of any meaningful warning in the 2016 financial statements or annual report strongly suggests that management was actively concealing the extent of the problem. A billion-pound write-down does not materialize from nothing. There should, at minimum, have been notes disclosing the risk of bad debts not yet reflected in the accounts. The failure to provide such disclosure points once again to managerial incompetence — and possibly to a deliberate attempt to avoid scrutiny — as one of the root causes of Carillion's collapse.
Appendix A: Carillion Financial Statements
Fiscal data as of Jun 30, 2017. All figures in millions of GBP.
Revenue and Gross Profit
Total revenue: Jun 30 2015: 1,961 | Dec 31 2015: 1,989 | Jun 30 2016: 2,087 | Dec 31 2016: 2,308 | Jun 30 2017: 2,104
Operating Expenses
Cost of revenue total: 1,809 | 1,801 | 1,917 | 2,127 | 1,935
Selling, general and administrative expenses, total: 78 | 98 | 102 | 103 | 99
Depreciation/amortization: 8.2 | 12 | 6.8 | 7 | 7.4
Unusual expense (income): 1.5 | 1 | –6.8 | –7.7 | 1,026
Total operating expense: 1,859 | 1,885 | 1,984 | 2,214 | 3,219
Operating income: 103 | 104 | 102 | 94 | –1,115
Other, net: –22 | –23 | –21 | –20 | –22
Income Taxes, Minority Interest and Extra Items
Net income before taxes: 68 | 88 | 84 | 63 | –1,153
Provision for income taxes: 8.3 | 7.4 | 12 | 5 | –32
Net income after taxes: 59 | 80 | 72 | 58 | –1,121
Minority interest: –4.5 | –2.1 | –3.9 | –1.4 | –2.4
Net income before extraordinary items: 55 | 78 | 68 | 56 | –1,124
Net income: 55 | 78 | 68 | 56 | –1,124
Income available to common (excl. extra. items): 55 | 78 | 68 | 56 | –1,124
Income available to common (incl. extra. items): 55 | 78 | 68 | 56 | –1,124
EPS Reconciliation
Basic/primary weighted average shares: 430 | 430 | 430 | 430 | 430
Basic/primary EPS excl. extra items: 0.13 | 0.18 | 0.16 | 0.13 | –2.61
Basic/primary EPS incl. extra items: 0.13 | 0.18 | 0.16 | 0.13 | –2.61
Dilution adjustment: 0 | 0 | 0 | 0 | —
Diluted weighted average shares: 430 | 520 | 475 | 476 | 430
Diluted EPS excl. extra items: 0.13 | 0.15 | 0.14 | 0.12 | –2.61
Diluted EPS incl. extra items: 0.13 | 0.15 | 0.14 | 0.12 | –2.61
Common Stock Dividends
DPS — common stock primary issue: 0.06 | 0.13 | 0.06 | 0.13 | 0
Gross dividend — common stock: 25 | 54 | 25 | 54 | 0
Pro Forma Income
Interest expense, supplemental: 6.4 | 7.7 | 7.6 | 9.9 | 10
Supplemental Income
Depreciation, supplemental: 14 | 12 | 13 | 18 | 19
Total special items: 1.5 | –8.4 | 3.7 | –7.7 | 1,027
Normalized Income
Normalized income before taxes: 69 | 79 | 88 | 55 | –127
Effect of special items on income taxes: 0.18 | –0.71 | 0.54 | –0.61 | 39
Income tax excluding impact of special items: 8.48 | 6.69 | 13 | 4.39 | 6.5
Normalized income after tax: 61 | 73 | 75 | 51 | –133
Normalized income available to common: 56 | 70 | 71 | 49 | –136
Basic normalized EPS: 0.13 | 0.16 | 0.16 | 0.11 | –0.31
Diluted normalized EPS: 0.13 | 0.14 | 0.15 | 0.10 | –0.31
Assets
Cash and short-term investments: 422 | 462 | 376 | 470 | 390
Total receivables, net: 1,479 | 1,272 | 1,441 | 1,675 | 1,193
Total inventory: 54 | 64 | 76 | 79 | 57
Other current assets, total: 6.1 | 15 | 35 | 46 | 42
Total current assets: 1,961 | 1,813 | 1,927 | 2,270 | 1,682
Property, plant and equipment, net: 133 | 141 | 149 | 144 | 138
Intangibles, net: 1,646 | 1,634 | 1,653 | 1,669 | 1,551
Long-term investments: 157 | 166 | 160 | 180 | 103
Total assets: 4,036 | 3,870 | 4,021 | 4,433 | 3,669
Liabilities
Accounts payable: 1,884 | 1,714 | 1,747 | 2,090 | 2,000
Notes payable/short-term debt: 0 | 0 | 0 | 0 | 0
Current portion of long-term debt/capital leases: 26 | 34 | 36 | 97 | 37
Other current liabilities, total: 40 | 24 | 41 | 31 | 228
Total current liabilities: 1,950 | 1,771 | 1,824 | 2,217 | 2,264
Total long-term debt: 595 | 599 | 630 | 592 | 924
Total debt: 621 | 632 | 666 | 689 | 961
Deferred income tax: 15 | 11 | 12 | 15 | 19
Minority interest: 24 | 24 | 29 | 29 | 30
Other liabilities, total: 542 | 473 | 585 | 878 | 867
Total liabilities: 3,126 | 2,877 | 3,080 | 3,732 | 4,105
Shareholders' Equity
Common stock: 215 | 215 | 215 | 215 | 215
Additional paid-in capital: 21 | 21 | 21 | 21 | 21
Retained earnings (accumulated deficit): 724 | 804 | 725 | 482 | –628
Other equity, total: –51 | –47 | –21 | –17 | –44
Total equity: 910 | 994 | 941 | 701 | –436
Total liabilities and shareholders' equity: 4,036 | 3,870 | 4,021 | 4,433 | 3,669
Total common shares outstanding: 430 | 430 | 430 | 430 | 430
Detrick, H. (2018). What you need to know about the collapse of Carillion, a UK construction giant. Fortune. Retrieved April 11, 2018, from http://fortune.com/2018/01/15/what-you-need-to-know-about-the-collapse-of-carillion-a-u-k-construction-giant/
Investopedia. (2018). Altman Z-score. Retrieved April 11, 2018, from https://www.investopedia.com/terms/a/altman.asp
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