When you have stock market bubbles, you have Initial
Public Offerings, or IPO`s. New companies get listed, and will often have
stellar returns on their opening day. These newly listed companies don`t
necessarily have to be profitable. Well, in a normally functioning stock market
companies who don`t make a profit wouldn`t even consider getting listed, not in
the least because it`s just very expensive to be listed and adhere to all the
regulatory paperwork. But during a bubble it`s a different world, and it seems
like everyone and their mother takes a shot at getting listed and receiving
funding from investors who are way too risk-hungry.
What`s
the percentage of companies who are not profitable when they IPO? It is close
to 80%. Almost matching the levels seen during the dot-com bubble, and far
surpassing the levels of 2008.
Many of these unprofitable companies, both newly listed as well as companies who`ve been around for a longer time, not only have a problem making profit, but they will also have a problem repaying their debt. Companies in the Russell 2000, an index composed of small-cap businesses, have more than 50% of their long- and short-term debt borrowed at floating interest rates. This means that with the current rise in interest rates across the board (both long- and short-term), it will become increasingly harder for companies to repay their debt, which in turn results in even higher losses and eventually bankruptcy.
“The
investor of today does not profit from yesterday`s growth”
- Warren
Buffett -
The information contained in this publication is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in this publication is that of the publisher and is subject to change without notice. The information in this publication may become outdated and there is no obligation to update any such information.