4 key figures already provide solid information about financial stability. (Photo: Freepik, user19770072)
Nothing is more constant than change. This also applies to companies. There are companies that have been successful for decades but still run into problems one day. The reasons are complex and can be company or industry specific. Investors often find it difficult to correctly assess numbers and trends. It is often not easy to distinguish whether a price decline indicates short-term problems or long-term, worsening challenges. But there are certainly warning signs that it is better to avoid “cheap” or speculative turnaround purchases.
Melting margins indicate increasing competition
Margins may fluctuate over different economic cycles, but they should remain competitive. If margins fall significantly, goods are sold at special offers and/or costs continually rise, these are clear warning signals that a company is on an unfavorable path. If sales also fall, profitability becomes increasingly threatened.
Growing debt impacts long-term success
With lower margins, the need for financing usually increases. Companies that increasingly need to use external financing to ensure daily operations or generate growth are at greater risk of their existence. Additionally, when rating agencies downgrade the company, interest costs rise, further exacerbating the financial burden.
Growing debts often prevent necessary investments in innovation and employees. Attractive talent is no longer being attracted and many good employees are leaving the company. This leads to a deterioration of the company’s image, especially on rating platforms, and reinforces the downward spiral, also with regard to so-called human capital.
Negative customer reviews have a negative impact on sales and image
When margins fall, savings or increasing debt are often necessary, which can lead to a loss of quality or economies of scale in the long term. Bad reviews from dissatisfied customers are also a serious threat. In today’s digital world, negative reviews spread particularly quickly. The image can be massively damaged in a short time and trust can be lost. Customers will consider alternatives and turn away.
However, if the company decides to invest despite falling margins, the increasing financing costs will put a strain on its financial survival – a dangerous risk.
These checks protect against high losses and surprises
No matter how successful the company is, a development check is always necessary at certain intervals. Because competition, customers and loss of quality can threaten any business. The easiest way to check the health of a company is quicker than many realize.
- Financial check: Is there sales growth? Are the margins developing better or similar to those of the competition? It is also important to take a look at the cash flow and debt development. Specially defined threshold values should not be exceeded or fallen below. These 4 key figures already provide solid information about the financial stability of the company.
- Research: Furthermore, it is now easy to obtain information about customer or employee satisfaction. Of course, this is not equally easy in all industries and for all company sizes. But the Internet opens up many opportunities to get a feel for customer satisfaction and employee satisfaction.
Exit – yes or no?
Investors are often unsure whether they should sell or continue to hold when prices fall. It is important for every investor to know their initial investment strategy. Anyone who relies on quality and long-term stability should separate from companies if there is a decline in margins, customer losses and a problematic debt situation – regardless of the current portfolio performance. A possible turnaround would be possible under these circumstances, but is fundamentally only realistic over a very long period of time.
Disclaimer:
Not investment advice. No call to buy or sell securities.