Bob FraserCFO & Macro Strategist | Data-Driven Investing Expert | Speaker & Author

How come that 70% of companies that go bankrupt are profitable? Steve Coughran

Name: How come that 70% of companies that go bankrupt are profitable? Steve Coughran
Uploaded: 2023-07-31T15:41:41+00:00
Duration: 34 s
Channel: Bob Fraser
Description: In this segment, Steve Coughran explains the seemingly paradoxical fact that about 70% of companies that file for bankruptcy are still profitable at the…

31 Jul 2023 · 1 min

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In this segment, Steve Coughran explains the seemingly paradoxical fact that about 70% of companies that file for bankruptcy are still profitable at the time they close. He attributes this to cash‑flow mismatches: large amounts of money can be tied up in working‑capital cycles, where accounts receivable exceed accounts payable, creating a liquidity crunch. Additionally, capital expenditures on property, plant, and equipment are recorded on the balance sheet and cash‑flow statement rather than the income statement, further draining cash even when earnings appear healthy. Coughran emphasizes that cash flow, not accounting profit, ultimately determines a firm’s intrinsic value and its ability to avoid bankruptcy.

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70% of companies that go bankrupt are profitable when they close their doors. Think about that. Yeah, people are like, well, how do they go bankrupt if they're profitable? Because there's the working capital requirements. You know, you have your money caught up in between accounts receivable and accounts payable, and that number can be massive sometimes. And then you also have capital expenditures, property, plant, equipment that you're buying. That's not accounted for on the income statement. It's captured on the balance sheet and the statement of cash flows. But most people don't look at that. So cash flow is king and really cash flow drives intrinsic value, which we'll get into here later on the episode.