The number of publicly traded companies receiving "going concern" warnings from their auditors is starting to spike, another sign of the deepening recession in the U.S. Unfortunately these warnings have come a little too late and are useless in helping investors avoid losses as the damage to equity prices are nearly total for the companies involved.

IN PICTURES: Digging Out Of Debt In 8 Steps

When a company is audited, the auditors are required to examine whether the company has an ability to continue as a going concern, or to put it in layman's terms: if the company's cash flow is negative, it can't pay its bills and no one will lend it money any longer. (To find out how a company spends its money and whether there will be any left over for investors, see Analyze Cash Flow The Easy Way.)

American Axle (NYSE:AXL) had a going concern warning in its filing last week. The company has 75% of its sales from General Motors (NYSE:GM) and is seeing fewer orders and delayed payments from the company as auto sales reach lows not seen for a generation. General Motors also received a similar warning just a few weeks before American Axle. The auto suppliers just received a pledge of $5 billion from the U.S. government to help them survive the plunge in auto sales.

The going concern warning from MGM Mirage (NYSE:MGM) came even after the company received a waiver from its lenders through May 15 to comply with the financial covenants contained in its lending agreements. The company had its ratings cut by the S&P to "CCC" after the waiver was announced.

The auto and hotel industry are not the only ones under financial distress as retailers are also suffering from cash flow and liquidity issues. Blockbuster Entertainment (NYSE:BBI) reported a loss of $374.1 million for 2008, due partly because of a write down of goodwill. The company received a going concern warning, but like MGM Mirage, it received a temporary respite when it extended the term of its credit facility with JP Morgan (NYSE:JPM) to September 30, 2010. The renegotiation affected 65% of the total facility.

One interesting going concern warning involved Crocs Inc. (Nasdaq:CROX), the maker of the ubiquitous rubber-like shoe. The company owes $22.4 million on its credit facility and it expires at the end of March 2009. Crocs reported cash at year-end of $51.7 million so it appears that the company has burned through much of that in the first quarter, or it would be able to pay off its credit facility with the cash if it couldn't renew it.

The going concern warning that many publicly traded companies are receiving is the financial equivalent of closing the barn door after the animals have left, and does little to help investors. All it does is confirm the obvious pending financial Armageddon.

Related Articles
  1. Investing

    Build a Retirement Portfolio for a Different World

    When it comes to retirement rules of thumb, the financial industry is experiencing new guidelines and the new rules for navigating retirement.
  2. Investing News

    Canada in Recession

    On September 1, 2015, Statistics Canada reported that the economy has contracted by 0.5% in Q2 2015, after falling 0.8% in previous quarter.
  3. Economics

    Is a Recession Coming?

    In the space of a week, the VIX Index, a measure of market volatility, spiked from 13, suggesting extreme complacency, to over 50, evidencing total panic.
  4. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  5. Investing

    What’s Holding Back the U.S. Consumer

    Even as job growth has surged and gasoline prices have plunged, U.S. consumers are proving slow to respond and repair their overextended balance sheets.
  6. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  7. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  8. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. The New Deal

    A series of domestic programs designed to help the United States ...
  3. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  4. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  5. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  6. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!