The corpse is supposed to file the death certificate. Under this “honor system” of mortality, the corpse sometimes gives itself the benefit of the doubt. -Warren Buffett, “Shareholder Letter,” 1984
Cryin’ won’t help you; prayin’ won’t do you no good. –My Ex.
We take up from Chapter 3 and move to Measuring the Risk of Financial distress: How to Avoid the Sick Men of the Stock Market in Chapter 4 of Quantitative Value (which you have if you are in the Deep-Value group at Google Groups). I will email Financial Shenanigans as a supplement to this chapter of uncovering distress/fraud.
Can one predict financial distress from the outside of a company BEFORE bankruptcy. Obviously, the first place to look is at the balance sheet for the quality of the assets vs. the terms and amount of the debt. Then look at the competitive nature of the company’s industry. Airlines tend to go bankrupt more than cola companies.
I think you must practice your skills as a financial analyst. When you read about a bankruptcy like Radio Shack, then download the financials for your records and look back for what signs you might have noticed. I will have other tips below.
Several research papers and case studies mentioned in Chapter 4 below. Especially look at the WorldCom case.
_predicting_financial_Distress Risk 2010
Forecasting Bankruptcy More Accurately
Predicting Bankruptcy for Worldcom Final
Litigation against WorldCom for Fraud
Practice your skills
You can look at these research reports from Off Wall Street and then download the financials of the companies mentioned and see if you can recreate the analysis.
Blood in the streets!
Why Gold Mining is a Tough Business_Pollitt (An interesting insight into this industry)
SEE YOU NEXT WEEK as we go into Chapter 5 in Quantitative Value.
Practice Like Jonah!