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Fire Your Stock Analyst!: Analyzing Stocks on Your Own by Harry Domash

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Pinpointing Financially Challenged Companies

Bankruptcy candidates typically fall into one of three categories:

  1. Busted Cash Burners: Newer firms that spend more than they take in are running short of cash, and can’t raise more. These companies have little or no long-term debt because they were originally funded via IPOs and by follow-on stock offerings.

  2. Overburdened Debtors: Typically, large, mature companies with a history of using debt to enhance productivity. Then, something happens, and they can no longer generate sufficient cash to service their debt.

  3. Solvent and/or profitable companies: Established firms that file bankruptcy to avoid crippling lawsuits, such as asbestos-related claims.

Here, we’ll focus on tools to detect the first two categories. ...

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