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

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs
Coronavirus and Your Money

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs

People have lots of questions about the new $3,000 or $3,600 child tax credit and the advance payments that the IRS will send to most families in 2021…
May 17, 2021
Thinking of Buying an RV or Motor Home? Think Again!
personal finance

Thinking of Buying an RV or Motor Home? Think Again!

A Lemon Law attorney has some insights on the downsides of RV ownership you should think about before putting your money down and hitting the road.
May 16, 2021
2021 Child Tax Credit Calculator
Tax Breaks

2021 Child Tax Credit Calculator

See how much money you'll get in advance under the new child tax credit rules for 2021. Payments will start July 15.
May 17, 2021

Recommended

Bonds: 10 Things You Need to Know
Investing for Income

Bonds: 10 Things You Need to Know

Bonds can be more complex than stocks, but it's not hard to become a knowledgeable fixed-income investor.
July 22, 2020
Warren Buffett Stocks Ranked: The Berkshire Hathaway Portfolio
stocks

Warren Buffett Stocks Ranked: The Berkshire Hathaway Portfolio

The Berkshire Hathaway portfolio is a diverse set of blue chips and, increasingly, lesser-known growth bets. Here's a look at every stock picked by Wa…
May 18, 2021
Stock Market Holidays in 2021
Markets

Stock Market Holidays in 2021

Is the stock market open today? Take a look at which days the NYSE, Nasdaq and bond markets take off in 2021.
April 26, 2021
Why I Like Ginnie Mae Funds Now
Investing for Income

Why I Like Ginnie Mae Funds Now

A portfolio of mortgages should retain their value better than ordinary bonds if interest rates rise.
February 28, 2021