Warning Signs of Business Bankruptcy, For Global Credit Analysis
Since the last financial crisis, bankruptcy has been creeping up around the globe.
It doesn’t matter if you’re doing business with a global container shipping business based in South Korea or a technology company headquartered in Germany – bankruptcy can strike anywhere. Hanjin Shipping Co, Ltd and Metric Mobility Solutions AG are two recent examples.
Both of these bankruptcies teach the same lesson. Business failure comes with warning signs, and the time to recognize increasing risk is before a key customer or supplier fails.
Read on, to learn the warning signs to watch for and how to come out ahead.
Two bankruptcies: Different stories, same outcome
Hanjin Shipping Co. Ltd. was the world’s seventh largest container carrier, but on August 31, 2016, the South Korean shipping company filed for bankruptcy, drowning in debt. In the aftermath, Hanjin had $14 billion worth of cargo around the world in ships docked outside ports that wouldn’t let them in. Around 8,300 cargo owners were involved – and Samsung alone had $38 million in stranded goods. The Hanjin bankruptcy caused huge supply chain problems for companies around the world.
Based in Germany, Metric Mobility Solutions AG operated in a different industry, geography and economy – providing data systems within public transport, parking, rail and logistics. But just one month before Hanjin, it also succumbed to bankruptcy, after brutal Q1 operating results, and a cascading set of financial problems.
A closer look: So, what went wrong?
Despite their differences, there’s a prolonged pattern of financial distress in both companies. In each case, the tell-tale warning signs included:
- A bad long-term trend for key metrics: Performance ratios, leverage ratios, liquidity ratios, and rates of return all sharply down
- Peer analysis that placed both companies in the bottom quartile for most ratios
- Rapidly declining market capitalization, delisting notices and ratings downgrades
- Changes in our FRISK® score, a predictor of public company financial stress
- Debt restructuring, sale of assets, concerns expressed in the MD&A statement
Early warnings – a crucial lifeline against rising global risk
With credit risk rising in different industries around the world, credit managers need to spot credit risk wherever it develops, in real time. This is easier said than done.
For instance, the Altman Z-Score is an industry-standard measure of public company default risk, but often signals fiscal danger too early for credit decisions. And payment data might not signal financial distress at all.
Contrast this with a more useful financial risk score geared to bankruptcy, which can provide well-timed warnings and give you time to reduce your exposure before the crisis shockwaves hit. For instance, the FRISK® financial risk score reliably predicts corporate failure, within 12 months, with 96% accuracy.
With both Hanjin and Metric Mobility Solutions, the FRISK® score signaled serious trouble – dropping to a ‘1’ in the months before bankruptcy. This offered a clear warning that the probability of bankruptcy was as much as 50-50.
Think your credit risk is just in North America?
It may appear that financial conditions on the other side of the world don’t affect your credit portfolio or supply chain. But today’s business is global; economies are interwoven. Whether due to rising debt in China, or declining commodity exports in emerging markets, global credit risk is up.
Learn your global risks: Your portfolio may be exposed to far more global credit risk than you think.
CreditRiskMonitor is a financial news and analysis service designed to help professionals stay ahead of public company risk quickly, accurately and cost-effectively. More than 35% of the Fortune 1000, plus thousands more worldwide, rely on our commercial credit reporting and predictive risk analytics for assessing the financial stability of more than 56,000 global public companies.
At the core of CreditRiskMonitor’s service is its 96%-accurate FRISK® score, which is formulated to predict public company bankruptcy risk. One of four key components calculated in the FRISK® score is crowdsourced subscriber activity. This unique system tracks subscribers' patterns of research activity, capturing and aggregating the real-time concerns of what are essentially the key gatekeepers of corporate credit. Other features of CreditRiskMonitor’s service include timely news alerts, the Altman Z”-Score, agency ratings, financial ratios and trends. CreditRiskMonitor’s network of trade contributors provides more than $140 billion in trade data on their counterparties every month, giving them visibility into their biggest dollar risks.