Is it possible to understand more about the wellbeing of a company’s financial health by monitoring news about a company? This was the question that LexisNexis and State of Flux wanted to answer through research into some of the high profile business failures that had taken place since 2008. By looking at more than 90,000 news articles about 28 different companies in the run up to their financial difficulty or bankruptcy, could early warning signs be predicted that would provide indications of the company struggling?
The research aimed to identify specific terms associated with companies in the weeks before they failed financially. By identifying specific terms that were common to companies in advance of financial failure, the intention was to see whether these terms were common in the run up to a company failing and, if so, what kind of early warning this could provide?
There are obvious terms that could be expected to be in use when companies are at risk of failure, such as ‘insolvency’ and ‘bankruptcy’. But, in the run up to business failure, companies are likely to be on the receiving end of specific types of negative news; reporting of poor financial results, impending administration, factory closures or redundancies – these provide early warning signs that can be identifiable in advance.
LexisNexis and State of Flux identified twenty terms that could be associated with failing companies, shown below.
The next part of the research was to see whether these terms were prevalent in news reporting in advance of the financial failure of 23 companies. The companies were all high profile failures but were in diverse industries and geographies. The research demonstrated that early warning indicators of risk could be identified in more than 80% of companies at risk of financial failure. In other words, news reporting could help to identify four out of five companies at risk of financial failure – in advance of these companies failing – as long as the right information was identified and analysed.
Identifying businesses that might be at risk enables suppliers to better manage supply chains
When businesses fail there is often a domino effect where suppliers and partners reliant on trading with the failing company are unable to weather the storm themselves. Good companies follow bad into insolvency. Identifying businesses that might be at risk early (and with some indicators it was possible to have up to six months’ early warning) enables suppliers and customers to better manage supply chain and outstanding debts, or to restructure in advance of the impending disaster.
To read the complete document on ‘Spotting the early warning signs of a company’s impending financial collapse’, click here.
The research used Nexis – a global database of premium-licensed content. LexisNexis works with more than 35,000 sources to license and aggregate various types of business information. The archive dates back 35 years, with millions of new and updated documents loaded every day directly from publishers. By focusing on authoritative sources of news and business information, Nexis users are able to avoid the ‘noise’ and content credibility gap that can be associated with some free web content and instantly access relevant business information.