How to gauge if a company is broke

There’s a range of calculations that can show investors whether a company’s financial house is in order or not.

- Simon Brown

A company going broke or into business rescue is something we’re seeing more with listed shares. As investors we naturally want to avoid holding shares of companies that hit business rescue because shareholders can expect very little from it, if anything.

The cause of bankruptcy is not just debt, but extends to the liquidity and solvency of a business. A company like Tongaat Hulett is technically bankrupt with its negative net asset value of around R4bn. Simply put: Tongaat’s liabilities exceed its assets by R4bn. But the business rescue practitioners are unlikely to be summoned, whereas other companies in a similar position could find themselves faced with a business rescue process.

What sets Tongaat Hulett apart is its ability to trade itself out of trouble. There are a few simple options companies in this position can consider.

Firstly, they could sell some of their assets. In mid-February Tongaat issued a cautionary announcement stating that it’s looking to sell its starch business. With a R300m profit for this unit for the six months through the end of September 2019, the sale would go a long way to plugging that R4bn hole.