InvestorQ : How do I judge if a company is a damaged company?
Nishant Chandani made post

How do I judge if a company is a damaged company?

3 years ago

Normally 3 questions will help you answer this point quite effectively.

Firstly, check if the company is overleveraged? Too much debt has been the bane of business. Any company with a high debt equity ratio and low interest coverage is a primary suspect. In times of economic downturn, such companies are the first victims. Always be extra cautious about overleveraged companies.

Secondly, is the industry going through a churn? We have seen this so often. It happened to textiles in the 90s, when they lost out to China. It happened to retail outlets the world over when the internet became a seamless market. And of course, it has happened to real estate too. These are stocks that are best avoided.

Lastly, is the company going from high growth to slow growth? That is a little bit like what happened to pharma sector in 2015. This is a deceptive investment trap. Some companies continued to be high quality but their sectors have moved from high growth to low-growth trajectories. Telecom, power, capital goods are classic examples.