Thursday 3 November 2016

Company Finance



Ways to figure out problems in a company's financial health


7 signs of a company in financial trouble
7 signs of a company in financial trouble

1/8
Text: Hiral Thanawala, ET Bureau

The following seven signs indicate that a company is in some kind of financial stress/trouble.

Tampering Financial Statement
Tampering Financial Statement

2/8
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.

Trade-off quality
Trade-off quality

3/8
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.

Negative free cash flow
Negative free cash flow

4/8
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.

Deteriorating net profit margin
Deteriorating net profit margin

5/8
Deteriorating net profit margins mean very high expenses. Net profit margin measures how well a company manages its expenses relative to its net sales.

Declining liquidity ratio
Declining liquidity ratio

6/8
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.

Rising debt
Rising debt

7/8
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.

Sluggish inventory
Sluggish inventory

8/8
A low inventory turnover implies excess inventory and weak sales. Inventory turnover measures the speed at which a company convert its inventory to sales.