How2Day: Signs That a Company May Go Bankrupt

If you are considering investing in a company, you will inevitably do some research on it first. During your research, there are several warning signs to look for that could tell you that a company is going out of business. Looking at financial ratios and business strategies can tip you off that a bankruptcy may be looming.

When evaluating a business, looking at the amount of positive cash flow that it has can be very telling. Regardless of how profitable a company is, it needs to have a steady stream of cash flow to keep the doors open. If a company is not good at collecting invoices, it could hurt the long-term prospects of the company. A negative cash flow tells you that the company is losing more money than it is gaining. After a certain amount of time, the company will burn through its savings and go out of business.

Some companies rely on a few customers for the bulk of their business. If a company has shifted all of its efforts into pleasing a single customer or a small group of customers, this could be a bad sign for longevity. If the customer switches suppliers or goes out of business themselves, it could be enough to close the business that you are thinking about investing in. Ideally, you should invest in companies that have a diverse customer base.

As a stock investor, you should be familiar with using financial ratios to evaluate companies. There are a number of financial ratios that you can use that will tell you if a company is close to bankruptcy. One of the most common ratios used for this process is the debt-to-equity ratio. This takes a look at the total amount of debt of the company in relation to the amount of assets that it has. If the debt-to-equity ratio is somewhere between .5 and 1, you have a company that could be headed toward bankruptcy. The interest-coverage ratio is another indicator that is often used to gauge the financial health of a company. To calculate this ratio, you can take the operating income of the company and divide it by the interest payments that it is has made. If you have a number below four, you may want to be concerned about a potential bankruptcy on the horizon. Companies could bounce back from a negative ratio, but it does not always happen.

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