One quarter of those which fail have a general indebtedness > 100% (*)
A general indebtedness of < 50% is absolutely healthy.
General indebtedness = debt/total assets
This shows what percentage of a company's total funds is being provided by third party funds, or debt.
Being > 100% indebted means a company's equity assets are negative, due to carrying over major losses:
so its liabilities exceed 100% of its total assets.
Such a situation is unsustainable in the long term (cf.
alarm bell procedure).
= A very bad sign!
Businesses do benefit from having a certain level of debt, however, as interest on debt capital is tax-deductible, for example.
Deducting notional interest also plays a major role in choosing between debt and equity in Belgium.
(*) Source: Companyweb: results based on our own study into causes of bankruptcies.
Negative returns for two years is a major heads-up to the Court of Commercial Enquiry at the Court of Commerce.
An established business which loses money year in, year out has no future anyway.
New businesses may often show a negative return (high startup costs, low sales at first, ...) but things should clearly be getting better after two years.
Profitability and liquidity together give a good idea of how a company is faring.
| Liquidity | Profitability |
|---|
| + | - |
| + | Healthy | Chronically sick |
| - | Temporarily sick | Dying |
(**)
(**) Source: Handbook "Financial analysis process" by Hubert Ooghe and Charles Van Wymeersch (Intersentia)
