I started my career at a subsidiary company inside a medium sized multinational engineering services firm, Wood Group (formally, John Wood Group - now, Wood). While working at a small company with ~100 employees globally, the vibes often told you everything you need to know. Stressed because of technically difficult project? All is good. Stressed because of lack of work? Not so good. Obviously, there are many more scenarios, but the vibes told me when times were tough and when times were good.

Over the years, you see the emails, the reports, or the internal blog posts talking about company performance. It all seems abstract; in fact, it feels almost irrelevant. Good? Bad? Doesn’t really matter as long as your boss doesn’t feel awful, your colleagues aren’t stressed to hell, and the projects still happen. So in all the years, I never took the time once to read our own annual report, look at our balance sheet, cash flow, margins, etc. Again, felt irrelevant.

Fast forward to 2024, years after that subsidiary was fully merged into the parent, when I come face to face with the reality that the company is not doing well financially. Throughout most of the year, it seemed the problem was not all that relevant to us. We’re all just chugging along, have a few offers to buy the company at a reasonable price, revenue is good - what’s not to like? Sure, neither Apollo or Sidara chose to go through with their offers to buy, but that doesn’t reflect poorly on us, right?

And then it starts:

  1. Austerity begins to be implemented. No non essential travel even when it’d help us grow. No conferences.
  2. Financial reports start having massive impairments on goodwill assets (which is a whole topic on its own).
  3. Exceptional items start becoming more and more prominent.
  4. An independent review is initiated by the Board directly and share price plummets “unexpectedly”.
  5. Details are refused to be shared publicly.
  6. “Defer” cost of living adjustments for staff salaries globally.
  7. Cancel bonus programs.
  8. Issue a trading update where share price goes down 50% in a day.

This looks like a death spiral, and if it walks like one, talks like one, it very well could be one. But the more interesting thing is that all of this was easily visible going back 6+ years:

  • Haven’t been profitable in years
  • Constant exceptional items that dwarfed potential to become profitable
  • Failure to course correct on any reasonable time frame.
  • Net debt going up with interest payments cutting into the ability to become profitable
  • Selling good portions of the business all to pay down debt from previous acquisitions and the resulting nightmare of unprofitability.
  • Failure to communicate a real reason why this is happening.

Reading the annual reports and paying attention to the cash flow position, balance sheet, net debt, and exceptionals, you will get a feel for whether a company is healthy or not real quick. I am not a trader and cannot suggest that this alone determines share price, but within the bounds of a single company, having good numbers on those items make it easier to value future prospects.

If I had read the reports and understood the precarious nature, maybe I’d raise more concerns or been able to exit my employee stock positions in a better way. Or maybe just avoid having to be a situation where I am concerned about this at all. But ultimately, the vibes were only part of the story. Vibes alone told me how my group and my slightly larger group were doing - vibes give you no help when there is massive contagion coming from another part of the business.

In other words, vibes are but one metric in how you should be evaluating the state of things, but for public companies, seeing the mandatory reports can tell you things far beyond the vibes.

Next one in the series is here.