When choosing stocks to buy, many of us like to think that the possibility of „our” company going bankrupt isn’t there. Probably that’s ALMOST true. But better safe than sorry, so you need to conduct some analysis from this perspective as well, here are couple of things you should note when checking out a certain stock.
- Dept/income ratio. Most of the on-their-way-to-bankruptcy companies have a debt/income ratio more than 10. According to analysts ratio around 8 is good, but a doubble-digit ratio could make you reconsider.
- Debt/equity ratio. If debt/equity ratio is above 0.5 ( according to some sources above 1.0) the company is a bad candidate for buying their stocks – meaning that they *might* go bankrupt. Rate 1.0 means that the company has as much debt as it has equity. Company with the rate of 0.5 is considered a low-debt company.
- Short-term debt. If a company needs to repay any great short term debts with big interest rates there might be problems with the company – to make sure check their profit margin. It has happened that companies with short-term loans who are unable to get an extension will eventually end up going bankrupt.
- Interest coverage ratio. Interest coverage ratio is a operating income divided by last 12 months of interest payments. If a company can’t handle to pay their debt interest rates, be alarmed. Good ratio is anything above 4. If the rate is 1.0 or less, the company might be in trouble.
- Altman Z-Score. For determining a company’s bankruptcy potential, Altman Z-Score has been worked out. This takes into consideration various variables. Z-Score of 1.81 or less is a good indicator that the company will go bankrupt within a year.
