One in six Nasdaq companies says it may not last another year

There is one sentence in a company’s quarterly report that I now look for before anything else: that conditions “raise substantial doubt” about its ability to continue as a going concern. It means management itself, not a short seller or a critic, has looked at the cash and the debts and cannot say the company will pay its bills for the next 12 months.

I expected it to be rare. A count of the latest quarterly report of every US-listed company that filed one between July and late October says it is not. On Nasdaq, 382 of 2,281 operating companies carry the warning, about one in six. On the New York Stock Exchange and NYSE American it is 3.4%.

Most of the gap is size. Half of the listed companies worth under $50 million carry it, and of the 1,589 companies worth more than $2 billion, only two do. Drug developers are the largest group, a third of them.

The part that surprised me most is how sticky it is. Of the companies that warned in a report filed between January and May, 94% still warned in their next one. And 36% of the Nasdaq companies with the warning were trading below $1.

The warning is not a bankruptcy forecast. Many of these companies raise money and carry on, usually by selling new shares to existing investors at lower prices. But for anyone buying a small company, it takes a minute to search the latest 10-Q for “going concern”, and it says more than most of the press releases.

Does anyone here check for it before buying?

The full count, with the method and the size and industry breakdowns: https://equibles.com/research/one-in-six-nasdaq-companies-doubts-it-can-last-a-year

Data: SEC quarterly filings, processed by Equibles.