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Submitted by: Puthan(VJ) Vijayan
Puthan(VJ) Vijayan is the Principal member of PMV Investment Advisors, LLC. The firm is a Registered Investment Advisor. VJ is a Certified Estate Planner and Registered Financial Consultant, with over 15 years of planning and investment experience.
May 31, 2007
fiduciary advisors have a responsibility to their clients to identify investments that may likely fail. It may help you identify companies that may likely go into bankruptcy or facing serious recurring financial
difficulties.
Rapidly decreasing cash & mounting losses:
companies that incur losses period after period, go through cash at a rapid pace. So to determine that, look into the company's balance sheet, comparing year over year. The company can dig itself out of it by issuing more debt or equity, but it may delay the inevitable.
Debt payments:
a company's income statement show how fast the cash is used to service the debt. Can the company keep losing money and make interest payments. You want to see a healthy cash balance, enough to keep its
creditors at a distance. But failing companies typically find it increasingly difficult to pay their bills. Current ratio or cash ratio calculation helps determine a company's ability to pay short term debt. It is determined by dividing current assets by current liabilities, ratio higher than one may indicate that the company may have a high chance a high chance of paying off its debt. Ratio less than one, indicate that the company may have a higher chance of not paying off its debt. Another test is the acid test ratio where the ration is calculated using current assets and current liabilities, excluding inventory and prepaid assets from current assets.
List by no means exhaustive, more red flags identified at a later article.
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