As turnaround investors, I prefer to invest in companies that are down but not out. This is important because a lot of times, investors understood the two. Often times, these two types of companies are trading near or at their 52 week low. But the similarity ends there.
Company that is down. This is the company that is experiencing problems and it looks like it could be the problem again. It just needs time to right the ship and get back on track. How can we be sure that the company can withstand the storm? The final guideline is to look at the balance sheet of the company and the profit and loss account. The company has a positive net cash? Is the company is expected to post a profit? If the answer is yes to both questions, then the company in question is most likely just go down, but not out.
Company is Out. This is the company that is experiencing problems, but its existence could be in doubt. It might right the ship, but by then it might be too late. As a result, shareholders will be wiped out and lose 100% of their investment. How can we be sure the company is out? Again, we have the ultimate guide, which is the balance and control. Profit and loss account of the company The company has a negative net cash? Is the company is expected to qualify for the near future? Losses If the answer is yes to both questions, then the company in question has the high probability of being out of business.
Using analogy be confusing without illustrations in my opinion. Therefore, I will choose for every situation a business. Do this please do not treat it as a buy or sell recommendation. This is just my observation as someone who these companies had looked for a while.
Pfizer Inc. (PFE) may be regarded as the company that is down. Share price slumped to 8 year low this week due to weak sales of its drug franchises and tepid guidance. The management has refused to work for 2006 and beyond due to uncertainty guidance. So, let's look at Pfizer balance, shall we? The latest information on Pfizer shows that the company has $ 15 billion in cash and equivalents and $ 5.517 billion in long-term debt. In other words, Pfizer has $ 9.5 billion of positive net cash. What about profits? Pfizer is expected to post a loss? Nope, it is expected to earnings of $ 1.95 per share for 2005 of $ 14 billion in net profit post. Profit is enough, while the balance sheet is solid. Pfizer clearly is a company that has only a small bump in the road.
What about AMR Corp. (AMR)? This is an excellent example of a company that is out. Looking at the balance sheet, AMR has a negative net cash of $ 9.5 billion. What this means is that the $ 9.5 billion more in the long-term debt then the money. AMR is profitable? Not a chance. It is expected a loss of $ 4.36 per share for 2005 places or $ 714 Million. It does not look nice. High amount of debt and big loss is the recipe for a company that is down. If AMR not to put on any time his ship could be forced to file bankruptcy quickly.
To make money consistently, investors should be able to the company that is down and out company that is differentiated. Weed out the company's and your return on investment will be so much better.
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