Identifying Turnaround Targets

I have a pretty limited data set where I need to identify potential turnaround targets based solely on: Sales, Sales growth, Net Income, NI growth, Total Assets, Stockholder Equity, Market Cap, EPS, Return to Investors, and # employees. After an initial sweep, more in-depth research will be done, but this is to narrow down a data set. What would be the most efficient and meaningful metrics and ratios that may indicate an underlying issue? Thanks in advance.

Comments (8)

May 25, 2011

To be honest, most of those metrics you provided aren't all that helpful to identify a turnaround target.

We'll assume you're looking for an operational turnaround target since none of those metrics will help you very much when identifying a financial turnaround target. You can back into Total Liabilities from Total Assets less Stockholder Equity, but even that won't get you the Total Debt number to figure out a leverage measurement.

As for operational turnaround targets, your metrics regarding asset size and # of employees are useless unless you have historical figures in which you can see if there is a trend of assets or employees decreasing, which isn't all too helpful either since even healthy firms spin-off segments or enact cost cutting measures. Continued sales growth depression could be useful, but at the very top line it's hard to tell how healthy a company is since almost any company can increase sales if it spends enough. Market cap again is easily misinterpreted. While declining share price can sometimes be a telling sign of a troubled company, market cap by itself is not very useful since companies can buy back shares. You could try to back into the number of shares by using EPS and net income.

Now if you had more data, as far as metrics to look for in financial turnaround targets:

- Total Debt / EBITDA
- Net Debt / EBITDA

EBITDA / Interest Expense
(EBITDA - CapEx) / Interest Expense
EBITDA / (Interest Expense + Principal Repayments)


Debt Maturities
Financial covenants (maximum leverage, minimum interest coverage)

May 25, 2011

South Sea made some great points. He/She also alluded to historical figures, which aren't going to be entirely conclusive but you could make a reasonable assumption that a company that has declined over the last few years could potentially have some upside.

Obviously there aren't going to be a ton of companies that didn't experience downward trends over the last few that will make the situation a bit more challenging.

Another thought, though it may be too granular and not fit with your 'initial sweep' approach, is to just compare the sales and NI growth figures and the margins to companies that operate in similar industries. If the sales growth or NI growth seem significantly lower than competitors then you could possibly assume there are some operational inefficiencies. Same thing with your profit margin.


May 25, 2011

Thanks for the input, guys. Believe me, I am well aware the data is less than ideal for what I'm trying to do. Completely agree with South Sea. The fact that the data is a snapshot and not historical makes any assumptions tenuous at best.

I want to identify companies with underlying operational problems as opposed to those requiring a financial restructuring, so I'm kind of learning towards the margin and growth comparisons. I also have three sets of the return to investors over 1 year, 5 years, and 10 years so I will probably look for a downward trend in those numbers.

    • 1
May 25, 2011

Very negative stock performance is the easiest filter for you.
Look for companies whose equity value has disappeared. Look for 12-24month stock price drops >80%. Investors are smart. This will reflect either exogenous or firm-specific factors like capital structure issues (e.g. overleverage, covenant breach, large maturity vs. low unrestricted liquidity+cash burn, too much secured debt), uncompetitiveness (e.g. product obsoleteness, market share destruction, cost structure/pricing mismanagement, bad acquisition). The goal of turnarounds is to rebuild equity value, so the easiest filter is to find companies where that equity value has been eradicated. FYI, never use book value (e.g. GAAP "Stockholders Equity") for non financial firms, it's misleading - in practice this number is impacted by a bunch of one-time bull, pension liability revaluation, tax issues, asset writedowns etc etc.

Jun 6, 2011

Interested in this as wel. I'm interning at a corporate recovery shop this summer.

Any more good advice?

Learn More

9 LBO Modeling Tests, 10+ hours of PE Cases and 2,447+ interview insights across 203 private equity funds. The WSO Private Equity Interview Prep Course has everything you'll ever need to break into the competitive PE industry. Learn more.

Jun 6, 2011

Does anyone have other good advice? I'll be starting at my internship shortly.

Apr 2, 2014

Bump. D&B ratings, recent liens and judgements, tax liens and judgements. Former Inc 500 award winners and Entrepreneur of the year winners.

Apr 6, 2014