Distress signals

Nine finance company failures in 16 months highlights the volatile nature of these types of investments. There are some good finance companies out there, but you need to sort the good from the bad. You have to be your own financial planner and not rely solely on financial advice.

Kapiti Coast sharebroker Chris Lee says there are 12 key "distress signals" to watch out for.

A simple search on the internet is usually enough to see whether a company has met one or more of the "distress signals". It doesn't take a highly paid financial adviser to warn you - look on the internet yourself.

If a company in which you're thinking of investing has sent out one or more of the following signals, be extremely cautious about investing in it. Some of these distress signals may apply only to listed companies.

The 12 distress signals

• Does the company have a credit rating from a reputable agency? Has the rating been stable in recent years?
  
  
• Does the company have any "enforceable undertakings" or other compliance issues with the New Zealand Securities or the Australian Securities and Investment Commission? (See Jargon buster for why this matters.)
  
  
• Does the company have any issues with the stock exchange (NZX or ASX) on either its listed or unlisted board?
  
  
• Has the company's share price fallen recently?
  
  
• Does the company have published bad debts? And has its percentage of bad debts been rising?
  
  
• Does the company have significant lending to related parties (such as companies or individuals able to control or significantly influence the finance company, or who are otherwise connected with the finance company?)
  
  
• Does the company invest in any unusual countries?
  
  
• Do the company's published accounts show a bad "liquidity profile" - for example, does it have enough cash on hand or overdraft arrangements with banks to meet its short-term cash-flow needs? Has it been able to get overdraft or standby facilities with a bank?
  
  
• Has the company recently increased its advertising (television, newspaper or radio)?
  
  
• Has the company been selling loans to competitors?
  
  
• Has the company borrowed money to meet interest payments?
  
  
• Have senior staff been leaving the company?

Lee says failed finance company Bridgecorp met all 12 "distress signals". He questions why financial advisers - who as professionals would have been well aware of this - continued to channel their clients' funds into Bridgecorp.