Forum Archive Index - July 2002

["John Wedde" <John.Wedde@weltec.ac.nz>]

Hi Shaun,

Insolvency is brought about by creditors demanding payment of
outstanding debts when these cannot be paid.

If the Proprietorship Ratio [ratio of Shareholders funds to total
funds] is low, say under 50%, the situation needs watching. Under 20%,
unless there are special circumstances --- stay away.

More critical perhaps though is an analysis of the ability of the
company to meet current obligations. The Current Ratio [ratio of current
assets to current liabilities] or variations of it, is very important.
If current assets are less than current liabilities, this is a clear
warning sign. If current assets consisted say largely of stock, and
perhaps stuff that had been hanging around for a while and wasn't easy
to sell, and there wasn't a lot of cash in the bank, and all the current
liabilities were short term creditors, some of whom were already getting
impatient ---- this would be a very clear sign of potential doom!   

Hope this helps,
Cheers,
John

   

>>> tennyson@caverock.net.nz Thursday, 18 July 2002 11:32:54 a.m. >>>
Hi Shaun,

>
>
> Can anyone recommend a book that covers assesing companies in
> trouble, how to assess their ability/likelihood of trading out of
> financial difficulty? Or websites etc.. Or advice..
> 
>

Well, you could start with this website ;-).

If it were me, I would be looking at trying to estimate revenues 
at the high point of the business cycle.  Superimpose these revenues 
on the existing cost structure, calculate a theoretical profit 
(and using a suitable P/E ratio, a share price) and you might have a 
good idea of the recovery potential.  If you have a profit then you 
can work out a share price based on a conservatively low P/E of say 6 
to 8.

The other factor you need to put into the equation is the existing 
company debt, and need for future capital expenditure.

If the company has never made a profit, then any such hypothesising 
is truly theoretical.  If that is the case, then all bets are off.

SNOOPY


  
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