10 warning signs that show a company is in trouble
Sometimes a company collapse generates shock and surprise. In some cases even analysts and investors didn’t see it coming. This week we’ve seen the latest in the UK’s long list of retailers heading for extinction. The difference with BHS is that the reasons were only too obvious to see. The company failed to adapt to e-commerce while the product range was viewed as dated by its dwindling customer base.
Whilst the shock of BHS continues there are other companies out there who are showing signs of stress. There are some early warning signs that analysts and investors should be looking out for.
- Failure to grasp digital
If you notice a retailer that is struggling to sell and deliver from your phone to your door they are in trouble. If you search for an app only to revert to using a desktop site on your mobile you know something isn’t right. Companies whether they are retailers or not need to adapt to the digital age. Failing to keep up with the pace of digital change is a sign things aren’t going well.
- Unconvincing mergers and acquisitions
Some CEOs have it in their DNA. They can’t resist a good shopping spree when they spot trouble on the horizon. Don’t get me wrong not all mergers are a bad decision. Sometimes a rapid succession of takeovers that appear to provide little strategic merit will set alarm bells ringing. If you hear a CEO announcing tie-ups that he or she doesn’t sound convinced about it’s time to worry.
- Activist investors
Boardroom disagreements aren’t always a bad thing. A healthy board will have continuous debates on a companies future. Trouble only rises when investors ‘go rogue’ and vent their frustration at the direction or lack of change within a company. Such behaviour indicates a company is approaching a crossroads where a wrong decision could spell disaster.
- Switching auditors outside the normal cycle
Changing auditors isn’t usually something to worry about. Most large organisations will change between the big five players from time to time. Following the Tesco debacle, most companies are keen to show they are switching audit providers more often. Worries surface when an auditor gets replaced at short notice. It can show there are disagreements or major fault lines in the relationship. For auditors the price of ‘cooking the books’ isn’t worth their license. For some audit firms a disagreement over how to log revenue or failure to act on recommendations is enough to end a relationship.
- Management churn
CEOs, CFOs and CIOs come and go. Having two leave in quick succession spells trouble. The departures might be due to disagreements or the fact that they can spot trouble coming their way. For boardrooms with high levels of churn it leaves behind a dysfunctional business unable to make decisions. When the remaining senior leaders spend more time on replenishing top talent than driving growth you know somethings is amiss.
- Debt mountains
Few businesses could operate without debt. Making capital investments often leads companies to stack up some short term debt on their books. The concern comes when the debt seems out of control or insurmountable. Think of it a bit like the Eurozone crisis. Once debt becomes unmanageable a company can think of little else. The risk grows that the business exists to feed debt rather than focus on growth.
- Dividend cut
No investor group likes to be told they’re not getting a dividend. There’s always a valid reason but it might not be a reason that shows a healthy company. Sometimes a dividend cut is necessary to invest more capital in a major upgrade or acquisition. A prolonged spell of absent dividend could indicate wider problems.
- Product zoo
For some businesses launching new products is something that happens every quarter. For the likes of L’Oreal and Proctor & Gamble new products provides news for customers and suppliers and a growth in revenue. The dangers are more serious for businesses where launches are out of kilter with market expectation and customer demand.
You often see this with software businesses. Product releases happen too often and sometimes with a myriad of unwanted features. After several years the company continues supporting older ‘sunset’ products while beginning rationalisation. For companies not used to transforming while growing it can mean the diversion of resources and more importantly focus.
- Investor sell-up
Shares trade and investors come and go. The bigger concern is when a blockholder or institution sells its share, often without warning. The large seller might have legitimate concerns they believe will not go away. For some blockholders close to their investments they get to see problems long before other investors.
- Customer migration
The most alarming and obvious one. Customers complaining on Twitter followed by company reports showing dwindling customers numbers spells trouble. It might be that some customers are cutting back and spending less. Customers walking out the door will have investors hot on their tails.