TOP WARNING SIGNALS FOR COMPANY TO GO BANKRUPT

Article by Dr. Nazri Khan first appeared in Mac 2014.

Transmile, Kenmark, Megan Media, Ekran, Linear Corp, Scan Associates, Golden Plus, Dis Technology, Welli Multi and of course Renong Berhad. All are distressed public listed companies which have disappeared.

Will Malaysia Airlines join them ? Good question. Maybe and maybe not.

My sixteen years experience shows that companies rarely go into bankruptcy without some warning. The following are the BEST TOP WARNING SIGNALS which will tell us 99% they are going under. Beware & Stay Away.

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Danger Sign No. 1
Management Scandal. Leaders keep changing.
A serious warning if top guys CEO or CFO take flight suddenly without explanation or give stupid reason such as personal commitement or personal health reason.

Danger Sign No. 2 
A History of Financial Restatements or Late Filings.
Late financial reporting and accounting restatements normally are associated with bad management integity. This was especially characteristic of companies engaging in complex accounting to sweep losses under the rugs and hide liabilities just to drive stock prices higher.

Danger Sign No. 3 
Faster Growth in Accounts Receivable With Flat Growth of Sales.
Faster growth of receivables than growth of sales. The balance sheet is full of rubbish sales with no cash to accrue. Bad companies have serious bad debts, rising receivables and credit downgrade.

Danger Sign No. 4 
Mysterious Growth In Inventories.
Unexpected bumps in inventories relative to sales. Growing inventories could signal a weak customer base, or worse, that the company use suspicious creative accounting to boost value of inventories to offset declining sales.

Danger Sign No. 5 
Mysteriously Bad Cash Flow With Strong Profits And Sales.
Cash flows is the most transparent and is extremely difficult for management to abuse. Bad cash flow normally suggest complex liquidity and smells trouble for the company. If net income is increasing at a faster clip than cash flow, beware. If earnings are rising year to year and cash flow is not, danger! Either way, something’s not right.

Danger Sign No. 6 
Frequent Change Bank Lender And Swim With Loan Sharks.
A company's relationship with its bank and any changes therein is also a useful financial signal. Reduced availability on a company credit line or a frequent change in borrowing patterns may be indicative of financial problems. Increase in loan security and unsecured loan from no-brand-lender are clear evidence of deterioration in the financial health of a business. Finally, the breaching of loan covenants or missed loan payments are clear warning signs that the company requires help.

Danger Sign No. 7 
Three Years Combo Of Sustain Operational Losses And Decline In Sales.
A sustained decline in sales, poor profit margins, losses, increased debt, a highly leveraged balance sheet and negative working capital over twelve straight quarters may be the best cancer signals of a serious financial distress.

Danger Sign No 8 
A Series Of Bad Lucks In A Row
Companies face so many highly improbabale one-time events back-to-back such as a warranty claim, the cancellation of a large order, a huge union strike, an adhoc special operational audit, a sudden uninsured fire or theft, a sudden departure of supplier or a serious change in supplier payments. A failure to explain this event may be some creative accounting management is using to cover operational losses.

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Hall Of Fame :
1. Transmile Group Berhad
Recorded a net loss of RM369.56 million and overstated its consolidated revenues by RM 530 million in 2005 after a special audit was conducted.

2. Kenmark Industrial Berhad
Fail to issue the fourth-quarter results 2010 for three months. Operations stopped while two banks demanded RM73 million. Became a PN17 company and shares tumbled 80 per cent.

3. Megan Media Holdings Berhad
Posted a mind-boggling net loss of RM1.14 billion for the fourth quarter ended April 30, 2007. Investigated by the Securities Commission, and found to have defaulted RM893.97mil in maturing banking facilities.

4. Ekran Berhad
Magnificent rise in 1990s corporate Malaysia but only to hit a peak months after it had been awarded the contract for the multi-billion ringgit Bakun hydroelectric dam project. Defaulted loan payments and was categorised as a PN1 and PN17 company for at least four years before delisted from Bursa Malaysia.

5. Linear Corp Berhad
A cooling systems company that has landed itself into a PN17 company after being investigated by Bursa Malaysia and the Securities Commission over its troubled RM1.6bil King Dome project in Manjung, Perak.

6. SCAN Associates Berhad
The board of directors lodged a police report and then dismissed CEO following an alleged misappropriation of near RM2 million funds.

7. Golden Plus Holdings Berhad
Failed to submit its audited accounts and annual report for 2007 and its quarterly report for the period ended March 2008 before being reprimanded by SC.

8. DIS Technology Holdings Berhad
Found to misstate several quarterly reports due to an alleged employee fraud worth RM80 mil reported by a major customer based in Hong Kong.

9. WELLI Multi Corp Berhad
Managing director were convicted for furnishing the Securities Commission with misleading fictitious sales information of RM141 million in its audited 2005 financial statement.

10. Renong Berhad
The deal involving United Engineers (M) Bhd’s (UEM) mysterious put option with a total cost of RM2.34bil from an unknown sellers which later expired with no settlement. The CEO later resigned from the group in October 2001 and later sues government for a sour business deal.

My dedication to all investors of these companies. Hope we learn something.

What happened to MAS?

7 Key Tips to Value Investing

1. Never Lose Money
2. Invest. Don’t Speculate
3. Don’t Invest on Margin
4. Don’t Listen to Mr. Market
5. Don’t Forget a Margin of Safety
6. Don’t Listen to Bad Management
7. Don’t Stop Reading

by www.fb.com/profit.at.bursa

Treat All Investors Equally

I REFER to the report “Bursa sets record straight on remisiers issues” (The Star, Dec 11). The concerns raised by the Remisiers’ Association of Malaysia or Pesama has its basis.

Liberalisation of brokerage fees is fine if it reduces trading cost for all investors. However, what many investors are not aware of is that there exist certain type of privileged market players who do not pay any fees. They are called Proprietary Day Traders (PDTs) and Investment Accounts (IVTs).

Basically, these are personal or the house account of the dealer or broker and their full-time job is to trade or speculate as much as possible.They are not serious or long-term investors as they will usually square their positions on the same day.

While most investors must pay brokerage fee, clearing fee and stamp duty whenever they trade, these PDTs and IVTs do not incur such costs. This zero cost privilege has enabled them to profit from even a minimal of one uptick or half a sen when normal investors have to wait patiently for at least nine upticks before they can even break even (based on the minimal brokerage of RM40 for both the buy and sell side).

Since they pay no fees and therefore bring no income to the regulators, why are they treated better than others?

Effectively, they are granted a free hand to trade, speculate or gamble in the market on a different set of rules of which the odds are better off than the genuine and serious investors.This has made a mockery of the fair and orderly market motto that the regulators often trumpet.

It has been argued that the privilege is given as an inducement for them to trade and thereby create an impression of active and vibrant market condition. The intention is well and good. However, the reality is that it has created extreme disorderliness and volatility to price and volume movement arising from their aggressive speculative nature and coming from a nothing-to-lose mentality due to the zero cost benefit.
Their no value added activities have caused more headaches than positives for the regulators.

Many unusual trading activities were not due to any material development in the company but were due to excessive speculation by these PDTs and IVTs.In addition, regulators have set little limits over their trading activities. It has often been said that the regulators have created an animal they can’t control.
It is like letting loose a high horsepower car on the highway without imposing any speed limit thereby endangering other users.

Many genuine and serious investors have been influenced/lured to trade by the price and volume trend, thinking something materially positive may be developing in the company; only to discover later that it was just speculation caused by these parties hoping to profit from price volatility.
The regulators need to get their act together and treat all investors equally especially when it comes to investing as the money used to invest may be hard earned.

Investors must also be informed and aware that rules of the game may not be the same for everyone and not be overly excited by rise in price and volume as this may just be hot air created out of nothing.

STRICTLY FAIR AND ORDERLY
Kajang

This reader comment was published in TheStar on 13Dec13.
So who is protecting the small fish?