Good morning! There was bad news for RSM Tenon (LON:TNO 2.25p pre-opening price) shareholders yesterday afternoon, as the shares plunged a further 32% to just 2.25p on an announcement of a possible takeover, but at lower than the current share price. Tenon is the latest in a line of accountancy groups that have expanded too fast, and got themselves into serious debt problems. It beggars belief that having made such a mess of their own finances, they then charge clients for financial advice services such as audit, tax, insolvency, corporate recovery, etc.
I warned readers here as long ago as 26 Feb 2013 that the finances of this group were so bad that it could only be considered "ultra high risk". The shares have fallen 65% since then, and might even end up being worth nothing, because the debt is so high.
Exceptionally lenient behaviour by the Banks (under political pressure) in the last few years has meant that many zombie companies have continued trading, even though they have insurmountable levels of debt. I think this has lulled many investors into a false sense of security, with some disregarding Balance Sheets altogether, in the foolish belief that Banks will not put a zombie company into Administration. This can occasionally be very lucrative - e.g. shareholders in Thomas Cook (LON:TCG 154p) were extremely lucky that it survived, despite having probably the worst Balance Sheet I can ever remember seeing, before it's recent refinancing.
However, in most cases a very weak Balance Sheet full of debt will end up with either insolvency, or a dilutive share issue at some point. As the economy recovers, and Bank Balance Sheets become strong enough to take the write-offs, expect more zombie companies to go to the wall. So do be careful!
Hence I shall retain my core policy of carefully scrutinising all company Balance Sheets, and flagging up poor situations like RSM Tenon as high risk, in the hope that readers will not get caught in such disastrous shares. We might risk missing the odd multi-bagger, but we should never see any 100% losses, if we focus only on companies with decent Balance Sheets.
Northbridge Industrial Services (LON:NBI 377p pre-opening price) issue…
