8 Signs of a Doomed Stock
Nothing is ever certain, but these eight signs can help you determine if a stock is about to crash.
1. Cash flow is a company’s lifeline. When cash payments exceed receipts, it means the company has a negative cash flow that can eventually lead to insolvency.
2. A debt-to-equity ratio measures a company’s bankruptcy risk by comparing its long- and short-term debts to its shareholders’ equity. A high ratio usually means the company has been aggressive in financing its growth with debt. Eventually, this debt can become too much to handle.
3. The interest coverage ratio reveals if a company is having difficult paying its debt. If a company’s ratio is below 1, it can’t meet its debt obligations with the period’s earnings before interest and tax.
4. The fourth sign is a decline in share prices. A sustained decline almost always precedes a corporate collapse. Enron’s stock started falling 16 months before it went bust. But remember, a declining stock can also signal a buying opportunity. Consider the next four signs to distinguish between a collapse and an opportunity.
5. Profit warnings should be taken very seriously. Growing evidence suggests markets underreact to bad news.
6. Companies must divulge insider trading, as in the purchase and sales of shares owned by substantial shareholders or directors. They have the most current intel, so heavy selling or buying can be a sign.
7. The sudden resignation of key executives or directors can also be a bad sign.
8. And finally, formal SEC investigations frequently precede a collapse. That only makes sense – desperate companies will resort to illegal activities to remain afloat.
