Signs that a Company May Be
Headed for Financial Trouble

As we know, there are inherent risks in investing in the stock market. The risks associated with stock market investing exist due to the simple laws of supply and demand. If you purchase a stock whose perceived value then decreases due to investor concerns over the long-term viability of that company, that stock may plummet, leaving you with what could be a significant loss. Long before a company gets into real trouble, however, there are warning signs you can look for that can steer you clear of making a bad investment decision. We’ve listed some of the indications that a company could be headed for trouble.

Negative Cash Flows: Cash flow offers stability and solvency to a company along with opportunities for expansion and growth. A company whose cash payments exceed its receipts is suspect. With decreasing cash, the company may be forced to increase its debt-load, which creates a bigger future burden for the company.

High Debt Levels: While it is the nature of some industries to incur higher levels of debt than others, investors should be on the lookout for companies that could collapse under the weight of exorbitant debt. High interest payments can stress cash flow and this stress can be exacerbated if the company is struggling to generate revenues. One of the tools you can use to assess a company’s debt level is the debt-to-equity ratio. A company that shows a high ratio compared to companies from the same sector may be a company at risk.

Large Volumes of Insider Sales: Large blocks of sales by company executives or sales by more than one insider can signal trouble. When officers of the company lose confidence it should be a significant “red flag” to investors.

Dividend Cut: Companies that pay dividends understand that their shareholder buy and hold these stocks largely for the income they offer. In cutting the dividend they run the risk of making their stock less attractive and driving the price down. A company that cuts its dividend usually will do this only as a last resort.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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