Q: What is a turnaround? A: A turna...

Q: What is a turnaround?

A: A turnaround is a company that is coming back almost from the dead. For any number of reasons, it had stumbl badly. It had made a major error it its game plan -- as it was as bad acquisitions -- and is now starting to inflect things around.

Q: What are the criteria you should use when evaluating a turnaround?

A: When considering the purchase of a turnaround, you should make indisputable you are very well-informed. First of all, I would not consider investing in a turnaround if there is still a threat of bankruptcy. This can be determined by means of examining the company's debt covenants and the interest and trespass coverage ratios. In addition, you should investigation the source and application of supplys statements, the balance sheet, and the notes to the financial statements.

Once you've established that bankruptcy is unlikely, you should pay particular attention to latter trends in the cash issue operating profit margin, and liability ratio. Quarterly data is particularly useful at this point. In a turnaround situation, the cash melt and earnings per share will have casted positive and should be seen to be increasing steadily. The operating profit margin will point out dramatic increases in recent quarters. You should also be seeing new consistent reductions in the due ratio. This indicates the company is reducing its misdoing load and reliance on fault financing.

It is also same important to know management's game plan for turning the company around.

Q: What should you be looking for in management's plan to make the turnaround happen?

A: Management is really the fundamental note to success in a turnaround. There must be a game plan. You should papal court clear evidence of major cost-cutting. The company should be downsizing dramatically and getting rid of unprofitable divisions. You want to behold radical surgery -- plants closing, massive layoffs, etc

It is also important to contemplate at what management was doing immoral before the turnaround, and ask yourself if they have the ability to fix the vexed questions If not, see if fresh management, with expertise, has taken mastery of the company. Generally, its encouraging if someone with a apportionment of experience in the company's business has bought-up a significant interest in the stock. This kind of hale entrepreneur will likely have as well-as; not only-but also; not only-but; not alone-but the ability and the incentive to make the turnaround a reality.

Q: in what manner important is the study of a company's industry in assessing the likelihood of a turnaround?

A: This is quite important. If the inclination in an industry is down, it will be often harder for a company to orchestrate a turnaround. forward the other hand, if the tendency is positive, the company has a earnestly better chance of success. Take the case of Consumer Packaging [a "Stock to Study" page 6] for instance. The glass business is doing a great deal better since the economy is improving and the liberated Trade adjustment period has passed.

Q: When is the best time to corrupt a turnaround

A: Again, it's important to make abiding the company is not going bankrupt before you consider buying. You should also make safe that earnings and cash arise have already started to improve. In all likelihood, the stock price will already have started to climb. on the contrary don't worry about missing gone out on a few dollars of capital gains. Buying before the turnaround is solidly underway is speculation -- a extremely dangerous form of investing.

Q: When is the best time to barter a turnaround?

A: If the turnaround happened in a shooting stock, the performance of the company should go on back to normal and give you long-term solid product You should make sell decisions about these stocks the same way you would with any others. If the turnaround happened in a cyclical stock, you should be prepared to vend at the predetermined price of the stock when examining the revolution of time for that particular stock in its particular industry [see "Cyclical Stocks: Not for the Faint-Hearted," page 56 of the Stock Selection Manual].

J SEBASTIAN VAN BERKOM IS PRESIDENT OF VAN BERKOM & ASSOCIATES INC., AND IS A MEMBER OF THE CSA's SECURITIES REVIEW BOARD.

Copyright Canadian Shareowner Magazine Inc. Mar/Apr 1995

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