Early warnings of failure

In our experience there are often early indications that a listed company is about to fail. Here are some signs, there may well be others:

  Management and board strife which is often accompanied by resignations and departures.

  Lengthy "discussions" or "negotiations" with bankers or other financiers over the extension of credit facilities.

  Proposals to raise further capital, particularly in the context of ongoing losses or other significant impairments.

  A capital raising that is not underwritten, extensions to the closing dates for the acceptance of applications under a prospectus, or significant shortfalls of shares not taken up.

  Share sales by members of the management team or board.

  Late lodgement of financial statements, particularly when there are indications that asset valuations are the cause.

  Auditors not signing the financial statements, delaying their sign-off or resigning.

  Directors or managers not drawing fees or salaries.

  Failure to maintain the company’s website or shutting the site down.

  Financial statements showing:

  Negative returns on equity.

  Negative cash flows at operating level.

  High gearing.

  Low or negative NTA (net tangible assets).

  Difficulty in making contact with the company, in particular with anybody in authority.

Investor Alert

Shareholders should be alert to these signs. Otherwise they may miss the opportunity to realise value for their investment.

Companies often collapse suddenly and it may be some time before the reasons for the collapse emerges. Failure is usually attributable to bad management, but management just as often point to other causes.

Shareholders are left to read the fine print of reports by external administrators or the post mortems of financial journalists to get the good oil.

Further Reading:

*A list of loss-making companies that filed their 2014 half year financial statements on the last due date. (Compiled by the Australian Shareholders' Association,)