Companies Are Going BANKRUPT... What Happens To Your Stock?!

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So recently we have started to see many companies in the mist of filing for bankruptcy or some have already officially came out and declared they will be filling. With this happening and possibly more joining the club I have had a lot of you ask about what happens to your stock if the company you own does end up filing for bankruptcy. So when I get a lot of the same questions, I feel it is best just to create a video on it.

The 2 main types of corporate bankruptcies are Chapter 11 and Chapter 7.
A Chapter 11 bankruptcy means a company is trying to "reorganize" its business and try to become profitable again. Management continues to run the day-to-day business operations but all significant business decisions must be approved by a bankruptcy court.
A Chapter 7 bankruptcy means the company stops all operations and goes completely out of business. A trustee is appointed to "liquidate" (sell) the company's assets and the money is used to pay off the debt, which may include debts to creditors and investors.

What It Means to Shareholders:
If it's a Chapter 11 bankruptcy, common stock shares will be practically worthless at the moment, and the shareholder won't be able to sell the shares because no one would want them. There is at least a chance that the company will indeed recover and their shares will regain some of their value.

If it's a Chapter 7 bankruptcy, the stock is defunct. The common shareholders may, at best, get a portion of their value back when the assets are distributed. They rarely get anything at all.
The usual order of debt repayment begins with any government taxes that are owed. Next in line are financial institutions that extended loans, other creditors such as suppliers and utility companies, bondholders, preferred shareholders, and, last of all, common shareholders.

HOW TO PREVENT THIS?
Unless you have the biggest balls in the world and are looking to invest in companies about to hit bankruptcy or currently in a chapter 11… Then here are some things you can look at to make sure that company is financially healthy and in a good position for you to invest your hard earned money.

Current Ratio: Total Current Assets/Total Current Liabilities. These are usually defined as assets that are cash or will be turned into cash in a year or less, and liabilities that will be paid in a year or less. A ratio under 1 indicates that the company’s debts due in a year or less are greater than its assets. The higher the number the better. Shows how many times the assets can pay for the liabilities.
Debt to Equity Ratio (D/E): The debt-to-equity (D/E) ratio is calculated by dividing a company’s total liabilities by its shareholder equity. It means a decreased probability of bankruptcy in the event of an economic downturn. A company with a higher ratio than its industry average, therefore, may have difficulty securing additional funding from either source. The optimal debt-to-equity ratio will tend to vary widely by industry, but the general consensus is that it should not be above a level of 2.0. While some very large companies in fixed asset-heavy industries (such as mining or manufacturing) may have ratios higher than 2, these are the exception rather than the rule.
Book Value: Total Assets – Total Liabilities.
1. It serves as the total value of the company's assets that shareholders would theoretically receive if a company were liquidated.
2. When compared to the company's market value, book value can indicate whether a stock is under- or overpriced. (p/b ratio I have talked about in other videos)

Thanks for watching

📧 EMAIL: jjbucknerbusiness@gmail.com

DISCLOSURE: Some of the links on this page are affiliate links, meaning, at no additional cost to you, I may earn a commission if you click through and make a purchase and/or subscribe.

I am not a financial advisor. The ideas presented in this video are personal opinions and for entertainment purposes only.

Outro Music: Vexento - With You
Cited Sources: https://www.investopedia.com/ask/answers/06/bankruptpublicfirm.asp, https://www.sec.gov/reportspubs/investor-publications/investorpubsbankrupthtm.html

Видео Companies Are Going BANKRUPT... What Happens To Your Stock?! канала JJ Buckner