investing

'Going Concern' Warnings Are a Growing Concern

When this accounting term pops up, pay attention. Bankruptcy might be close behind.

Investors are reading headlines about companies issuing the dreaded "ability to continue as a going concern" warning seemingly every other day.

Sad to say, they might just have to get used to it. The economic damage caused by the pandemic has only just begun to push companies to the brink of bankruptcy.

For the uninitiated, "going concern" is an accounting concept. A company that is able to meet its financial obligations when they come due is considered a going concern. When accountants fear a company might, say, default on some of its debt in the next 12 months, the company is required to report in its financial statements that there are doubts about the firm’s ability to continue as a going concern.

Investors often take a going concern warning as a bankruptcy warning, even though technically speaking, it doesn't mean a Chapter 11 filing is imminent.

But it ain't good news, that's for sure.

Companies with recent going concern warnings include airlines El Al (ELALF) and Avianca (AVH), fracking play Chesapeake Energy (CHK), car-rental company Hertz (HTZ), restaurant chain Dave & Buster's (PLAY) and Norwegian Cruise Line (NCLH).

As an example of what this kind of warning looks like, here's language from Hertz in a recent SEC filing (emphasis ours):

"If our business does not recover quickly and we are unable to successfully restructure our substantial indebtedness, obtain further waivers or forbearance or raise additional capital, there is substantial doubt that we will be able to continue as a going concern."

It's possible that negotiations with creditors will allow some or all of these companies to avoid having to file for bankruptcy protection. And there's always a chance that a company finds a lifeline somewhere. A loan, an infusion of capital by selling stock or some other sort of bailout could do the trick.

External auditors don't necessarily know everything management is doing behind the scenes to shore up a company's liquidity. Their job is to assess the books and business conditions. That's why a going concern warning isn't an automatic predictor of a bankruptcy filing.

Either way, investors who are paying attention shouldn't be surprised by a company getting slapped with a going concern warning. It's fairly obvious that some sectors of the economy have come to a standstill. Moreover, balance sheets and cash flow statements are public documents.

But no matter how expected a going concern warning might be, it's still unnerving.

Investors with a high tolerance for risk might be comfortable holding stock in a company whose accountants doubt its ability to remain solvent. In the case of a turnaround in which equity investors don't get wiped out, shareholders who bought low can reap rich rewards.

Most, however, will probably sleep better at night by steering clear of shares in such distressed firms.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
The 12 Best Tech Stocks to Buy for 2022
tech stocks

The 12 Best Tech Stocks to Buy for 2022

The best tech-sector picks for the year to come include plays on some of the most exciting emergent technologies, as well as several old-guard mega-ca…
January 3, 2022
How to Know When You Can Retire
retirement

How to Know When You Can Retire

You’ve scrimped and saved, but are you really ready to retire? Here are some helpful calculations that could help you decide whether you can actually …
January 5, 2022

Recommended

Is the Stock Market Closed on MLK Day?
Markets

Is the Stock Market Closed on MLK Day?

Both the stock markets and bond markets will have Monday off as the nation honors civil rights leader Martin Luther King Jr.
January 15, 2022
Stock Market Holidays in 2022
Markets

Stock Market Holidays in 2022

Is the stock market open today? Take a look at which days the NYSE, Nasdaq and bond markets take off in 2022.
January 14, 2022
4 Tips on How to Build a Better Bond Position
bonds

4 Tips on How to Build a Better Bond Position

In a world where stock markets keep setting records, bonds look quite dull in comparison. But don’t give up on them! Polish up your bond portfolio usi…
January 12, 2022
5 Beginner Investing Tips for a Healthy Headspace
Becoming an Investor

5 Beginner Investing Tips for a Healthy Headspace

Lousy with numbers? Bad with money? That's OK. By adopting the right mentality, you can learn not only how to invest, but how to do so effectively.
December 30, 2021