How do I avoid buying shares of a company that might go bankrupt?
![How do I avoid buying shares of a company that might go bankrupt?](https://ussnsimg.moomoo.com/16246086728841-77777015-web-0f4b4a53086aa9c5.jpg/bigmoo)
By Melody
As we start our investing journey, we might run into all kinds of situations. One of these situations would be the case where we hold shares of a company that has filed for bankruptcy. As soon as it happens, we will see a significant drop in share prices.
As we start our investing journey, we might run into all kinds of situations. One of these situations would be the case where we hold shares of a company that has filed for bankruptcy. As soon as it happens, we will see a significant drop in share prices.
In order to avoid being in this situation, what should we do?
First, we have to understand why companies go bankrupt.
Businesses that go bankrupt don't usually do so because they're not profitable. Rather, they go bankrupt because their cash reserves run dry, and they can't meet current payment obligations. An otherwise profitable company may also run out of cash because their capital requirements continue to increase in order to support additional investment in inventories and accounts receivable as they grow.
What should we look at to help us as an investor?
The working capital ratio(aka current ratio) can help us avoid this pitfall.
Working capital represents a company's ability to pay its current liabilities with its current assets. Working capital is an important measure of financial health since creditors can measure a company's ability to pay off its debts within a year.
Assessing the health of a company in which you want to invest involves understanding its liquidity—how easily that company can turn assets into cash to pay short-term obligations. The working capital ratio is calculated by dividing current assets by current liabilities.
Here is the formula:
WORKING CAPITAL RATIO = CURRENT ASSETS ÷ CURRENT LIABILITIES
But how can I look up working capital ratio(current ratio) on moomoo?
WORKING CAPITAL RATIO = CURRENT ASSETS ÷ CURRENT LIABILITIES
But how can I look up working capital ratio(current ratio) on moomoo?
For PC users:
![How do I avoid buying shares of a company that might go bankrupt?](https://ussnsimg.moomoo.com/4126576305745580270.png/bigmoo)
For mobile users:
![How do I avoid buying shares of a company that might go bankrupt?](https://ussnsimg.moomoo.com/8030370993505859442.png/bigmoo)
![How do I avoid buying shares of a company that might go bankrupt?](https://ussnsimg.moomoo.com/2710196897771391244.png/bigmoo)
What is a healthy working capital ratio?
Anything in the 1.2 to 2.0 range is considered a healthy working capital ratio. If it drops below 1.0 you're in risky territory, known as negative working capital. With more liabilities than assets, you'd have to sell your current assets to pay off your liabilities.
Got a ratio over 2.0 and think you're golden? It's not quite that simple. Higher ratios aren't always a good thing. Anything above 2.0 could suggest that the business isn't using its assets to its full advantage.
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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annaleahc :![+1 👍](https://static.moomoo.com/nnq/emoji/static/image/img-apple-64/1f44d-1f3fd.png)
![+1 👍](https://static.moomoo.com/nnq/emoji/static/image/img-apple-64/1f44d-1f3fd.png)
![+1 👍](https://static.moomoo.com/nnq/emoji/static/image/img-apple-64/1f44d-1f3fd.png)
Revathy : Tried this methodology for Snap stocks…but not working as Snap stocks are rising now. The ratio less than 1.![grimacing 😬](https://static.moomoo.com/nnq/emoji/static/image/img-apple-64/1f62c.png)
Ten Step : Had been pondering this very question yesterday![thinking_face 🤔](https://static.moomoo.com/nnq/emoji/static/image/img-apple-64/1f914.png)
GreenHarvest : Thanks
102827248 huat : ok
71335420 : Thank you![pray 🙏](https://static.moomoo.com/nnq/emoji/static/image/img-apple-64/1f64f.png)
Ahjussi : good article
jojobeans : Thank for sharing
Angelapoey Trader : thanks for sharing
vchhay : Great lesson!
Investing with moomoo OP Revathy : Hi, Revathy. I calculated the working capital ratio for Snap, as for Q1 2021, Snap has an working capital ratio of 4.31. Total current assets = 3.24B, total current liabilities = 751.93M(0.75193B).
Revathy Investing with moomoo OP : Oh thanks for the clarifications. I saw the units wrongly![grimacing 😬](https://static.moomoo.com/nnq/emoji/static/image/img-apple-64/1f62c.png)
Revathy Investing with moomoo OP : But then again, working captital more than 2, advisable to buy?
Investing with moomoo OP Revathy : I can’t provide any advise on buying or not buying a stock. What I can say is that at least in this case Snap is more than capable of paying off it’s liabilities!
sslp : like
kaya butter Revathy : oh dear... hope MOOMOO can advise
102950140 : Will keep in mind when screening stock...![blush 😊](https://static.moomoo.com/nnq/emoji/static/image/img-apple-64/1f60a.png)
Investing with moomoo OP kaya butter : Hi~Snap 2021 Q1 actually has a working capital ratio of 4+. She used incorrect units when calculating. It’s clarified in the comments section~ Do pay attention to the units when calculating, and happy investing~
ycliau :![](https://emoticon.futunn.com/rich_big_face/04.png)
kaya butter Investing with moomoo OP : excellent, to point out the correction!
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