If the company has a very low balance sheet total, this may indicate minimal business activity or an "empty shell" structure where the company is barely active in regular business operations.
While a low balance sheet in itself is not necessarily problematic, it does complicate the assessment of actual business operations and financial performance. It may also indicate insufficient resources to achieve corporate objectives or meet future obligations.
With a structurally low balance sheet size, it is advisable to critically evaluate the company's continuity. Smaller companies have an increased risk of bankruptcy(*).
(*) Source: Gupta et al. (2015). Forecasting bankruptcy for SMEs using hazard function: To what extent does size matter?. Review of Quantitative Finance and Accounting, 45(4), 845-869.
If the annual accounts show negative assets or negative liabilities, or if the balance sheet is unbalanced, this indicates an incorrect balance sheet presentation that does not comply with accounting principles.
Negative assets and liabilities are, by definition, impossible. An unbalanced balance sheet, where total assets do not perfectly equal total liabilities, violates the fundamental accounting principle that the balance sheet must always balance.
This incorrect balance sheet information makes a reliable assessment of the financial position impossible. As long as the balance sheet contains incorrect information or is unbalanced, no reliable statements can be made about the solvency, liquidity, or financial continuity of the company.
If a large portion of the debt consists of short-term financing, this could indicate rollover risk. The company relies on regular refinancing, which can lead to liquidity problems in the event of deteriorating market conditions or credit terms(*).
Rollover risk is particularly problematic when there is already a high level of debt. High debt levels and high debt service costs can create default risks, potentially leading to bankruptcy.
(*) Source: Sander Lammers, Friso Scheepstra and Adam Elbourne. Een analyse van Nederlandse bedrijfsschulden. Centraal Planbureau, June 2024.
If a company's equity is negative, it means that the company's liabilities exceed its assets. This can be due to, among other things, carried forward losses or impairment losses.
This is a serious warning sign: negative equity indicates a weakened financial position. The board must assess whether the company can continue to meet its obligations in the short term (the so-called going concern assessment).
With negative equity, there is an increased risk of bankruptcy(*), as the company depends on creditor support for its continued existence.
(*) Source: results based on our own study into causes of bankruptcies.
