Key Indicators of Predicting Bankruptcy - Essay Example

From the company’s perspective, if the company files bankruptcy protection in a court of law then the court assigns an agent to the company, who arranges payments to repay the debt through different modes or ceases the business operations and auctions off their assets and property.

KEY INDICATORS OF PREDICTING BANKRUPTCY

The key indicators of bankruptcy prediction are stated below:

• If a company does not update its financial records and reporting then there are probable chances that in the near future, a company might end up bankrupt. (Tenk)
• The sharp increase in the cost of capital due to internal inefficiency or macro-level factors like recession in the economy also increases the chances of bankruptcy.
• Shortfalls in dividend payments make a significant impression on the stock prices and also show the shareholders are not satisfied with the company’s policies.
• If the company is not ready for intense competition then its likelihood of bankruptcy increases slightly, keeping in lieu of the current global business environment (Tenk).
• If the Quick ratio, Current ratio, and Times Interest Earned ratio are negative then this is an indication that the company faces liquidity problems and the creditors are not satisfied with the company’s financial performance, and also the creditors will not issue more debt in the future (Tenk).
• If the company’s cash outflows are higher than the cash inflows then this is an alarming situation for the company. It gives also the indication that there is any mismanagement exists in the company’s operating, investing, and financing activities (Tenk).
• Fraud, misrepresentation, and misappropriation of funds are also a prime factor that invites bankruptcy in the long run.

MAIN EFFECTS AFTER DECLARATION OF BANKRUPTCY

1. Implication on Current Assets: Current assets are reviewed critically after the announcement of bankruptcy. All the necessary payments to the creditors are made through the sale of those assets. (Main Effects of Petitioning for Bankruptcy).
2. Implication on Future Assets: After bankruptcy, the company loses its money with respect to the payments made to the creditors and the money left is insufficient in order to acquire back the assets, to start running the business again in the future. Moreover, the time value of money and the factor of inflation also make a significant impression on future assets. (Main Effects of Petitioning for Bankruptcy).  
3. Implication on Future Credit: The element of bankruptcy also brings about a curse for the company as it then faces difficulty in acquiring additional debt for its future business operations. Because of bankruptcy, the company’s goodwill and credit ratings are also negatively impacted (Main Effects of Petitioning for Bankruptcy). 

PROS AND CONS OF BANKRUPTCY

The advantages of bankruptcy are stated below:

• After filing the bankruptcy, the creditors are legally bound to stop all activities of debt collection.
• Filing for Bankruptcy gives the company a fresh financial start
• In most, bankruptcy cases certain categories of property like home, life insurance, and car, are exempted in order to the repayment of debt to creditors.

The disadvantages of bankruptcy are stated below:

• Declaration of bankruptcy distorts the image and goodwill of the company.
• In near future, the company faces difficulty financing its expenses by acquiring more debt.
• Due to the bankruptcy, the company’s stock prices fall and there is an implication of ceasing future business operations.
• Due to the effect of bankruptcy, the company loses control over its property (Bankruptcy Pros and Cons).
• In order to sue or file for bankruptcy in a court of law, the company hires law firms that charge a significant amount of money. (Bankruptcy Pros and Cons).

BANKRUPT COMPANIES

Bankrupt companies are those companies that failed to pay off their liabilities due to poor financial health. Financial trouble leads companies towards bankruptcy and then the company files for bankruptcy in a court of law. Due to the lack of financing and distress cost, the company is unable to pay back its debt. After the filing of bankruptcy, the court’s judgment is very important, as it reveals exactly how much money will be paid back to the creditors.  

COMPANIES FACING BANKRUPTCY IN 2009

In the year 2008, the world’s renowned financial institutions and companies faced bankruptcy. Washington Mutual, Lehman Brothers Holdings Inc, Delta Airlines Inc, etc filed for bankruptcy in the year 2009. According to the Administrative Office of the U.S. Courts, Bankruptcy filings in the federal courts rose 31 percent in the calendar year 2008. Moreover, the majority of bankruptcy filings mainly comprise non-business debts. The companies that are heading toward bankruptcy are stated below:   

• Sirius XM Satellite Radio is facing a significant problem in the repayment of its debt. In the year 2008 company incurred a loss of half a million dollars due to inefficient strategy (Companies Facing Bankruptcy in 2009).
• Ford lost 2.7 Billion in the year 2009, the main reason behind this is the current financial crunch which led to a drop in sales by 53% (Companies Facing Bankruptcy in 2009).
• Although General Motors received some money from the federal government under the bailout package it is not sufficient enough for the company to overcome the loss of $27 Billion (Companies Facing Bankruptcy in 2009).
• The Circuit City stores, a renowned electronic retailer company also filed for bankruptcy protection in the year 2008.