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Financial  Distress Thomas Cook
Financial  Distress Thomas Cook
Financial  Distress Thomas Cook
Financial  Distress Thomas Cook
Financial  Distress Thomas Cook
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Financial Distress Thomas Cook

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Financial distress is a situation in which the firm is unable or faces difficulty in paying off its financial obligations and if the conditions aren’t improved upon, it could also lead to bankruptcy. …

Financial distress is a situation in which the firm is unable or faces difficulty in paying off its financial obligations and if the conditions aren’t improved upon, it could also lead to bankruptcy. For our analysis we have chosen Thomas Cook Group PLC (LSE: TCG). Thomas Cook & Son was an established and well renowned brand and has been in existence since the 1800’s. Thomas Group Plc was created in 2007 by the merger of Thomas Cook AG and MyTravel Group Plc. Our five parameters for financial distress are as follows:

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  • 1. Thomas Cook Group PLC Financial Distress
  • 2. STUDENT INFORMATION DETAILS – GROUP-4 Names Vivek Yadav Michael Shinzaki Utkarsh Ranjan Rohit Kumar Rashmi Sinha Roll No. GDEC12IBWM066 GDEC12CMM018 GDEC12IT092 GDEC12IT082 GDEC12IT081 E-mail vivekY.gdec12@spjain.org Michael.gdec12@spjain.org Utkarsh.gdec12@spjain.org Rohit.gdec12@spjain.org Rashmi.gdec12@spjain.org
  • 3. Financial Distress Financial distress is a situation in which the firm is unable or faces difficulty in paying off its financial obligations and if the conditions aren’t improved upon, it could also lead to bankruptcy. For our analysis we have chosen Thomas Cook Group PLC (LSE: TCG). Thomas Cook & Son was an established and well renowned brand and has been in existence since the 1800’s. Thomas Group Plc was created in 2007 by the merger of Thomas Cook AG and MyTravel Group Plc. Our five parameters for financial distress are as follows: Altman Z score (for non-manufacturers) The Z score value gives the probability of a firm getting bankrupt within the next two years. If the value of the Z score is lower than 1.8 for a private sector company, it is said to be in the distress zone. Based on our calculations, the Z score value of Thomas Cook was -0.987 for the fiscal years ending in 2012 which means that the company has higher chances of bankruptcy. The weaker Z score can be attributed to the negative working capital, poor asset turnover, net losses etc. Mountains of Debt Mountains of debt are piling in the company’s balance sheet. The total debt to equity ratio has increased from 103.8% to 272.7% in 2012. Before the global financial crises Thomas Cook was sitting on a cash pile of 394 million pounds. In the wake of the crises, the market condition deteriorated it faced a cash crunch and the company had to take massive short term and long term debt financing in 2011 and 2012 to be afloat. Business & Operational Losses The euro zone crisis along with the rise of competitors such as Expedia and budget airlines has led to significant business and operational losses for the company. Due to increasing stiff competition the company is getting squeezed. The gross profit margins are 21.8% for 2012 and the EBIT margin is extremely thin at 1.8%. Selling General and administrative expenses are taking a company for the run. Out of the last five years, the first two the company earned a net income of less than 1% and in the last three it has steadily and drastically increasing net losses. Selling of Operational Non-Current Assets On 12 July 2011, the Group announced its intention to dispose of certain hotel and surplus assets, which are expected to generate net proceeds of up to £200m over a six to eighteen month period. On 29 September 2011, the Board announced its decision not to declare any further dividend payments whilst the Group re-builds its balance sheet. Over 500 underperforming performing were removed from the portfolio and since October 2011 149 stores have been closed, including head office properties and one – sixth of the company will be let gone. It also returned six aircraft back to the lessors. In 2012 the Cash flow from investments
  • 4. increased by 52 million as around 180 million of divestitures and property plant and equipment were undertaken. Dramatic loss of confidence in the market by sudden plunge in share price. Because of the cash crunch in 2011, market lost confidence in 2011 and the stock price dropped almost 90% from 200 pounds to 20 pounds. Thomas Cook immediately had to take drastic measures to gain public confidence and take massive debts and announce restructuring plans. Conclusion: Based on the above five areas we conclude that Thomas Cook PLC is financially distressed. Reduced consumer spending coupled with stiff competition from budget airlines and online portals is hurting the company. Miniscule operating margins and mounting levels of debt are putting a huge dent in the net income (loss) leaving nothing for shareholders. However the company is restructuring itself and trying every means to be able to back on its feet. Good news is the cash problem is solved. Market has gained confidence and much of it can be seen it the rising share price from near crises level of 20 pounds to 150 pounds in fiscal year 2012.
  • 5. Appendix: Z score Calculation: Z score for non-manufacturer industrials T1 = (Current Assets – Current Liabilities)/Total Assets T2 = Retained Earnings/Total Assets T3 = EBIT/Total Assets T4 = Book Value of Equity/Total Liabilities Year Sales Current Assets Total Assets Current Liabilities Total Liabilities Retained Equity Total Equity EBIT 2012 9491.2 1524.2 5906.8 3540.1 5448.9 -1450 457.9 -319.3 Ratio T1 T2 T3 T4 -0.341284621 0.24548 0.05406 0.084035 Values 6.56 3.26 6.72 1.05 Weight Z Score -0.987

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