When investing in companies, it’s important to know exactly how a company is performing. While it isn’t easy to receive regular insider information on what’s going on in a company, it’s possible to know whether it’s in trouble by following these signs.
There are companies that lose money quarterly, and these companies burn through their cash rapidly. Always review the company’s balance sheet as well as its cash flow statement. One of your main goals is to see how and how much cash is being spent.
Now, if the company is being spent because of investing activities, the company might be spending for its future.
On the other hand, if the company spending more and more money in its operating activities and it’s still not recording a profit, you might have to be worried.
At the same time, don’t forget to check whether there has been a large increase in cash. The reason for the increase might be because the company just sold an asset.
Compromised Interest Payments
The company’s income statement will tell you what it pays in order to pay its debts. See whether it can afford to keep losing money while also servicing its debts and making interest payments.
You can use various ratios to measure the company’s ability to service its debts. For one, the current ratio or cash ratio is a metric that tells you how much the company can pay its short-term debt.
To get this ratio, the current assets is divided by the current liabilities. A ratio that goes higher than one means the company has a good chance of paying its debts, while a reading that’s below one means it may not be able to pay the debts.
Every public company needs to have an outside auditor to audit their books. Although it’s not a rare occurrence to see a company switch from one firm to another, it’s still a red flag to see it dismiss or switch auditors suddenly and without clear explanation.
It might mean that it has a disagreement over the way to book revenue. It might also indicate a disagreement between the auditor and the management team.
Cut in Dividends
Companies that cut or even eliminate their dividend payment to stock holders are not always tiptoeing towards bankruptcy.
But in many cases, companies that go through a rough patch generally let go of dividends first. The management doesn’t easily decide to cut dividend payments unless it’s super necessary. That’s because they know such a move would pummel the stock’s price down.
Still, it’s important to find other supporting evidence that the dividend cut is pointing to a bleaker time for the company.
Top Management Departures
More often than not, companies that are driving at a rocky road see senior members of the management team leave to take a job at a different company.
Then, the current employees take over the senior executive’s places. If this happens too often in the company, you should certainly think twice about it.
Selling Off Flagship Businesses
It’s quite a telltale sign when you see a company selling a business that you know it holds dearly. If it’s selling some of its most important business arms or assets, it might mean that the company has already emptied its savings and is now struggling to keep afloat.