I am not saying this is what is about to happen to Pernix. But below are the clear signals of companies that do file for bankruptcy.
•Rapidly decelerating earnings growth. Typically, the companies that face the risk of bankruptcy are the ones that see their business rapidly evaporate. This can be due to a variety of reasons, but the first tell-tale sign is clear: decreasing earnings growth. Companies will try to hide the fact their earnings growth is slowing, usually by bragging about posting "record" earnings. But when you see the slowdown, that's you're first tip off of trouble. Typically, you'll also see the stock start to sell off, another warning.
•Rise of losses. It's one thing for a company to mature, and settle on a slower rate of growth. But it's quite another when you see a slowdown worsen into actual net losses. Look at the bottom line in the income statement, for net loss. When you see a net loss, you should be ready to sell your stake of a company, unless you have a good reason to think it's temporary.
Again, companies will try to hide their losses, often talking about "pro forma" or "adjusted earnings" that strip out costs. Some companies might also focus on revenue. Investors are usually not fooled, and push the stock even lower.
•Rising interest expenses as a percentage of revenue. Companies don't automatically go bankrupt, even if they're losing money. What does them in is that debt loads that looked fine when things were going good, suddenly turn onerous as revenue and profit falls. The tipoff is interest expense rising as a percentage of revenue.
•The management shuffle. As a company starts running into more serious trouble, the board and investors start looking for people to blame. Typically, you'll start to see lots of turnover at the top ranks, as investors look for a quick fix. Getting delisted from a major exchange, like the New York Stock Exchange or Nasdaq, is typically common at this phase, too.
•The auditor shuffle. Once the board realizes that the problem isn't the CEO, but the company's business model, things have already deteriorated significantly. Typically, at this point you'll see notices in the annual report and other regulatory filings that the company has replaced or disagreed with its accountants and auditors. This is a very bad sign.
•Notice of alternative strategies. When business continues to worsen, the company is faced with the uncomfortable situation of seeing what options it has. You'll typically see a very cryptically written press release that says the company is pursuing "strategic alternatives." The company often tries to imply it might be bought, but usually the odds of that are small.
•Press release discussing debt restructuring. These press releases try to put a positive spin on a dismal event. Typically, they discuss how the company will be looking to lower its debt load. That's good news for the company, but bad news for shareholders because it means they will likely lose everything.
As you can see, there are many phases of the typical company's downward spiral before shareholders are wiped out. It can take years for a company to cycle through all the steps, giving investors who are paying attention plenty of time to get out. Yes, there are exceptions and some companies can fall apart much faster. Companies like Lehman collapsed in weeks not years.
Even so, if you're going to invest in individual stocks or stay employed by your company, you need to bear the risk that a firm may fail. You need to pay attention, or take the unnecessary risk of losing it all.
•Rapidly decelerating earnings growth. Typically, the companies that face the risk of bankruptcy are the ones that see their business rapidly evaporate. This can be due to a variety of reasons, but the first tell-tale sign is clear: decreasing earnings growth. Companies will try to hide the fact their earnings growth is slowing, usually by bragging about posting "record" earnings. But when you see the slowdown, that's you're first tip off of trouble. Typically, you'll also see the stock start to sell off, another warning.
•Rise of losses. It's one thing for a company to mature, and settle on a slower rate of growth. But it's quite another when you see a slowdown worsen into actual net losses. Look at the bottom line in the income statement, for net loss. When you see a net loss, you should be ready to sell your stake of a company, unless you have a good reason to think it's temporary.
Again, companies will try to hide their losses, often talking about "pro forma" or "adjusted earnings" that strip out costs. Some companies might also focus on revenue. Investors are usually not fooled, and push the stock even lower.
•Rising interest expenses as a percentage of revenue. Companies don't automatically go bankrupt, even if they're losing money. What does them in is that debt loads that looked fine when things were going good, suddenly turn onerous as revenue and profit falls. The tipoff is interest expense rising as a percentage of revenue.
•The management shuffle. As a company starts running into more serious trouble, the board and investors start looking for people to blame. Typically, you'll start to see lots of turnover at the top ranks, as investors look for a quick fix. Getting delisted from a major exchange, like the New York Stock Exchange or Nasdaq, is typically common at this phase, too.
•The auditor shuffle. Once the board realizes that the problem isn't the CEO, but the company's business model, things have already deteriorated significantly. Typically, at this point you'll see notices in the annual report and other regulatory filings that the company has replaced or disagreed with its accountants and auditors. This is a very bad sign.
•Notice of alternative strategies. When business continues to worsen, the company is faced with the uncomfortable situation of seeing what options it has. You'll typically see a very cryptically written press release that says the company is pursuing "strategic alternatives." The company often tries to imply it might be bought, but usually the odds of that are small.
•Press release discussing debt restructuring. These press releases try to put a positive spin on a dismal event. Typically, they discuss how the company will be looking to lower its debt load. That's good news for the company, but bad news for shareholders because it means they will likely lose everything.
As you can see, there are many phases of the typical company's downward spiral before shareholders are wiped out. It can take years for a company to cycle through all the steps, giving investors who are paying attention plenty of time to get out. Yes, there are exceptions and some companies can fall apart much faster. Companies like Lehman collapsed in weeks not years.
Even so, if you're going to invest in individual stocks or stay employed by your company, you need to bear the risk that a firm may fail. You need to pay attention, or take the unnecessary risk of losing it all.