Chalice Brands Ltd CHALF

Warning signs when public companies fail

[Boddington]

What happened at Chalice is a typical textbook description
• Sustained periods of negative cash flows, negative EBITDA (cash outflows exceed cash inflows) can indicate a company is in financial distress, (operational cash flow = - $1.51million
• The debt-to-equity ratio compares a company's debt to shareholders' equity and is a good measure in assessing a company's debt default risk, Chalice Debt to Equity ratio is 71.3 meaning each dollar Chalice owns, it owes $73 in debt
• More audits of financial statements can often uncover numerous warning signs like the -37% profitability & overwhelming debt maturing in 2022
• Business name, managerial changes, reverse split, etc. such as a deviation away from a traditional business model or the sudden departure or removal of key management/ board personnel, can also signal signs of distress.
• Continued borrowing ($27 million) where the debt remains unpaid (in CHALF case, not even the interest is paid).Interest repayments can put pressure on cash flow, and this pressure is likely to be exacerbated for a distressed company. Because they have a higher risk of defaulting on their loans (maturing in 2022), struggling companies must pay a higher interest rate to borrow money. As a result, debt tends to shrink returns.