There are too many companies which are on the brink. Some might make it intact, some might have become stronger, some might have got maimed while some might be on the verge of close-down. And then there are some which have already closed down.
If you have been an investor in any of the companies which are on the verge of a shut down, instead of feeling like a victim, it would have been much prudent if you had kept a watch, looking out for some warning signs.
The collapse or even the fraud does not happen overnight. Usually, there are more than enough warnings –suspension of trading is just before the collapse but the first sign is when companies stop declaring their earnings at the right time and then you look deeper, you will find so many instances of something not being right in the company.
So the question in the mind - how do I recognize this company? There are many ways – management, earnings, way of working and so many things. But if you want it ‘instantly’ like ordering food on Swiggy, we can pay attention to the various warnings which SEBI gives.
The ministry of corporate affairs (MCA) is yet to publish the list of companies who have not yet filed their annual results and by early next year, we are sure to have a long list from SEBI of companies which are not traceable, companies which have simply vanished. Under normal circumstances itself, the list if pretty long and now with the pandemic playing havoc, the list will be unfortunately much longer.
So what are the warning signs we need to watch out for? A quick look at some of the obvious reasons:
1: Resignation of auditors just before declaration of earnings
2: Negative cash flows – cash payments exceeds cash receipts
3: High debt equity ratio – interest payment putting pressure on earnings; Companies with D/E ratios of 0.5 and above deserve a closer look.
4: Interest coverage ratio – below 1 means the company is not able to meet all of its debt obligations.
5: Unusual share price decline – Enron’s share price started falling 16 months before it went bust.
6: Pay very very close attention to profit warnings
7: When promoters sell, investors need to pause and look where it is heading
8: Sudden departure of key executives or directors – these surely demand closer inspection.
9: Pay close attention to the financial situations of companies that are targeted by SEBI.
10: Companies start missing scheduled filing dates of financial statements.
11: Companies restate their financial statements.
12: It is fishy when management gives bizarre answers or outright non sequiturs to analyst questions during quarterly earnings.
13: Promoters take out money for personal expenses
Risk is inherent in any investment but not paying attention to some of the above mentioned warning signs could mean you are blind, deaf and mute.