Reading Financial Reports For Dummies, 3rd Edition

Chapter 25

Ten Signs That a Company's in Trouble

IN THIS CHAPTER

Keeping an eye on a company's financial numbers

Examining a company's methods and procedures

If you don't recognize traffic signs, driving is going to be pretty hairy. By the same token, if you don't recognize a company's danger signs by reading the financial reports, your investment decisions may not be the best ones.

Many companies put out glossy financial reports more than 100 pages long with the most graphically pleasing sections providing only the news about the company that its managers want you to read. Don't be fooled. Take the time to read the pages in smaller print and the ones without the fancy graphics, because these pages are where you find the most important financial news about the company. The following are key signs of trouble that you may find within these pages.

Lower Liquidity

Liquidity is the ability of a company to quickly convert assets to cash so that it can pay its bills and meet other debt obligations, such as a mortgage payment or a payment due to bond investors. The most liquid asset a company holds is cash in a checking or savings account. Other good liquid sources are holdings that a company can quickly convert to cash, such as marketable securities and certificates of deposits.