ETWealth
7 ways to figure out problems in a company's financial health
1/8
7 signs of a company in financial trouble
Text: Hiral Thanawala, ET Bureau
The following seven signs indicate that a company is in some kind of financial stress/trouble.
The following seven signs indicate that a company is in some kind of financial stress/trouble.
2/8
Tampering Financial Statement
With the 2009 Satyam Computer Services fraud a case in point, some companies deliberately manipulate their financial statements, showing improper expenses, revenues, asset value and liabilities.
3/8
Trade-off quality
When a company starts compromising on quality after creating a brand for years, it ruins its brand value, leading to a drop in stock prices. A recent example of this being Welspun India.
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4/8
Negative free cash flow
A company with negative free cash flow indicates an inability to generate enough cash to support the business. Free cash flow tracks the cash a company has left over after meeting its operating expenses.
5/8
Deteriorating net profit margin
Deteriorating net profit margins mean very high expenses. Net profit margin measures how well a company manages its expenses relative to its net sales.
6/8
Declining liquidity ratio
A current ratio of below 1 means a company's short-term assets are not enough to meet its current debt obligations. The liquidity ratio indicates a company's ability to pay off its current liabilities.
7/8
Rising debt
A debt ratio analyses a company's overall debt burden and its ability to pay it off. A company with more debt than assets are highly leveraged and its net profit margins decline over the same period.
8/8
Sluggish inventory
A low inventory turnover implies excess inventory and weak sales. Inventory turnover measures the speed at which a company convert its inventory to sales.