Which Companies Might Suffer In A Financial Crisis?

Many stock markets around the globe have made very poor starts to 2016. In just the first four days of trading in 2016 alone, Singapore’s market benchmark, the Straits Times Index  (SGX: ^STI), has already fallen by 5.3% from end-2015 to 2,730 points on Thursday.

Stock market crashes and financial crises need not always come hand in hand. But, it’s worth considering at this stage: What companies in Singapore might be at risk if a financial crisis, similar to events in 2008-09, were to happen again this year?

One thing that can happen in a financial crisis is that debt markets can freeze up.  When this occurs, companies with high debt may find it hard to refinance their borrowings. Such companies might then have to raise equity capital (in the process potentially diluting the interests of existing shareholders) or face the possibility of bankruptcy in a worst-case scenario.

Let’s take a look at a few companies that face such risks.

Not all glittery anymore

Property developer and jewellery retailer Aspial Corporation Limited (SGX: A30) is one company on the list.

Aspial, whose jewellery business falls under retail outlets such as Aspial, Lee-Hwa, Goldheart, and CITIGEMS, currently has a very high total debt to equity ratio of 345% and a net debt to EBITDA (earnings before interest, taxes, depreciation, and amortisation) ratio of 57.

Moreover, the company has not been generating positive cash flow from its operations over the past six years from 2009 to 2014. That means the firm has been sustaining its operations by taking on more and more debt through the years.

During a financial crisis, Aspial may not be able to continue borrowing more or even refinance its current borrowings. That could be disastrous for the firm.

Another company on the list is COSCO Corporation (Singapore) Limited (SGX: F83). The China-based ship builder has a total debt to equity ratio of 287% and a net debt to EBITDA ratio of 56. In a similar manner to Aspial, COSCO also has a history of generating negative cash flow from its operations over the past few years.

If a financial crisis does arrive in 2016, COSCO might have to face some major challenges to keep its business running.

Foolish Summary

One well-known investing quote by billionaire investor Warren Buffett is this: “You only find out who is swimming naked when the tide goes out.” But by then, it may be too late. It makes sense to try and figure out the companies that have a high probability of having been swimming naked all these while.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim does not own shares in any of the companies mentioned above.