Early Warning Signs of a Distressed Vendor

Buyers' Training
April 4, 2013 — 1,263 views  
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When making investment purchases, you may imagine your returns increasing each day. But sometimes, that’s not how things really are. It is painful to see your investments sinking. Lost investments cannot be saved, if the company you trust is declared bankrupt. However, there are glaring signs to spot a distressed vendor. Once you can begin to see those signs, you will recognize the distressed vendor and keep away from them. Without the ability to detect those warning signals, you will often rush headlong to make purchases but rue later. It’s not too late even if you’ve lost. Here are the distress signals to look for.

Warning Signs in Financial Statements

The first thing to look for is financial statements. You will invariably see the red flag, if there’s one in the financial statement. Do you find that the payments exceed income? Is this trend sustained over a long time? Evidently then the company’s negative cash flow should raise suspicion. The suspicion gets strengthened if the negative trend is sustained. One or few off negative cash flow is normal in any business. The sustained negative cash flow, on the other hand, is the sign that the company is in trouble.

Interest repayments can be distressing for distressed companies because they have to pay interest at a higher rate since they are at a risk of defaulting. An easy indicator that indicates the risk of a company likely to default is debt to equity ratio. A high D/E ratio shows that the company is a high debt company as against a low debt company. The auditor’s report can also indicate distress, while auditor replacement indicates that all is not well with the company.    

Warning Signs in Management and the Business

Distress signals and warning signs should also be accessed in operational management as financial statement is not always accessible to the general public. Some of the signs to be studied include changes observed in business environment, such as economic down turn, emergence of one or more competitors, changes in buyer’s behavior, and several more. Read through the changes in market trends. If you notice drastic changes in a company’s strategy, the company is probably in financial trouble.

Changes like sudden slashing of prices or selling of core assets indicate the desperate need of the company to garner more cash by selling assets. Deteriorating quality and standard is yet another distress signal. Companies heading towards bankruptcy compromise with quality so the services will be poor, deliveries will be late, calls will not be attended, and refund requests will be pending. If the senior most managerial rung begins departing, the trouble is large and clear.    

If you thought you’ve invested in the best known company, and your investment is safe, you need a wake up call. In today’s finicky market, no investment is safe, if you fail to read the warning signal. In fact, there’s not just one--but a plethora of warning signals and indicators that scream – “stay away from this distressed vendor!” If you are deaf to this loud decibel because you’re enamored by its mesmerizing brand name of advertisements, you know who is to be blamed. The first thing is to look for is the company’s financial statement. If it is not accessible there are other things to look at, like the market and current business environment.  

Buyers' Training