When investing in the stock markets, we look for companies which are not only financially ‘healthy’ but also exhibit a ‘growth potential’ going forward.
In this post we identify some symptoms of corporate sickness which might indicate an impending corporate failure. This will help you identify the companies you need to stay away from.
The following are certain symptoms of corporate distress. Note very carefully the fact that these symptoms might be present even in profit-making units.
1. Diminishing profits and a continuing contraction of market share.
2. Insufficient technology absorption and the inability of a company to embrace critical newer technologies as and when they arrive.
3. Rapid turnover of key personnel.
4. Failure to meet statutory liabilities. [Peruse auditor’s report for information on same]
5. Abrupt disposal of shares by promoters.
6. Default in redemption of debentures or re-payment of term loans.
7. Low capacity utilisation.
8. Persisting labour unrest at key plants.
9. Non-submission of financial statements on time.
10. Alleged siphoning of funds out of the business.
Note: Over leveraged companies with a very high debt equity ratio are often risky investment bets. Any news that the company might be facing difficulty in meeting its interest obligations, might spark off large scale selling in the scrip and an unsuspecting investor’s capital might be eroded in no time. Recent cases of Bhusan steel and Amtek Auto can be cited as examples in this regard.