Is it safe to invest in this class of companies?

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An analysis by BusinessLine recently pointed out that 285 of the 3,133 listed companies have a negative net worth towards the end of fiscal year 2014-15. This was recorded as twice the number in 2011. What is more concerning is the fact that many companies have entered this league in the in last few years.  Moreover, those who were already in the list have eroded their net worth even further.

Going into details, one of the leading reasons for this turmoil is the global downturn in commodities.  Some of the major influences on this front were-

• Steel companies were hit by the sluggish trend in the global steel industry. Cheaper imports weighed on domestic steel players. Added to this was the China's currency devaluation which further augmented cheap imports.
• Sugar companies were impacted by the fall in sugar prices. The glut in global commodity markets also burdened the situation. Lastly, the rising cane prices added further anguish. All of these pushed the net worth of sugar industries in the red.  
• Companies with high debt levels also took a major hit. Higher interest outflows towards their debt have eroded their net worth.

The situation needs to be given an attention. This is because a company's net worth is a key indicator of its financial health. It also points what the company has with it for its future expansion.  A negative net worth balance indicates that the company doesn't have enough cash. It can't meet its daily or future requirements.

It is usually chronically loss making companies that carry negative net worth balance in their balance sheet. Going by that, as an investor, it is pertinent to keep a tab on your company's net worth.

However, as per the article, investors have taken an optimistic view on such bleeding companies. Stocks of most of these companies have favored by investors on hopes of a better price outlook.

While a company cannot be judged by its net worth alone, it can be a window to the actual happenings behind the company's façade. A negative net worth can possibly mean that the company's operations are unviable and warrant closure. With that, one should always vouch for the net worth of a company.

Lastly, all stock investment decisions should ideally start with identifying good businesses. These are the businesses with wide competitive advantage in an industry which they operate. Investing solely on the price movement of a stock, could be a risky bet.

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