Is there a reliable way to find, if a stock or company is heading bankruptcy?
You can avoid companies that might go bankrupt by not buying the stock of companies with debt. Every quarter, a public company must file financials with the EDGAR system called a 10-Q. This filing includes unaudited financial statements and provides a continuing view of the company's financial position during the year. Any debt the company has acquired will appear on this filing and their annual report. If servicing the debt is costing the company a substantial fraction of their income, then the company is a bankruptcy risk. Research the company. Obtain and read their current and past financial statements. Find and read news stories about them. Look for patterns and draw conclusions. Or diversify to the point where one company failing doesn't hurt you significantly. Or both.
Just to be clear, it is Chapter 11. They are only restructuring their debt, not closing down. Every store is still open and will continue to be for a while. Things are not necessarily clear skies for them, but they definitely aren't going under yet "From the Times A Reader Q.&A. on G.M.’s Bankruptcy Q. I own G.M. preferred shares. Should I be looking to sell them, or   hold on? I bought them at $25 a share when they were issued in late   2001. — Karen, Manhattan A. When a company files for bankruptcy, its various stock and   bondholders essentially get in line. The first investors to be repaid   are secured debt holders, then senior bond investors, followed by   subordinated debt holders. Preferred shareholders are next, and   lastly, holders of common stock. In a bankruptcy, preferred shares are usually worthless, much like   shares of common stock. But in the case of G.M., there may be some   good — or at least somewhat better — news. Most of G.M.’s preferred   shares are actually senior notes or “quarterly interest bonds,” which   means you will be treated as a bondholder, according to Marilyn Cohen,   president of Envision Capital Management. So you will be able to   exchange your preferreds for G.M. stock (bondholders will receive 10   percent of the new company’s stock). It’s not the best deal, but it   beats the empty bag true preferred shareholders would have been left   holding. Of course this is just one example, and you were hoping to get some larger picture. The article stated ""In a bankruptcy, preferred shares are usually worthless, much like shares of common stock"" which at least is a bit closer to that, if you accept usually as a statistic." Start by going onto google.com/finance and click through every publicly traded Fortune 500 company. Click on all their charts and look through their graphs for any patters. There will almost always be a pattern even if it is vague and fairly unpredictable. Then look for any jumps or drops in price. Look for the reason of the jump or drop. It could range commonly from news, lay off announcements, acquisitions, etc or just moving along with the market direction for the day. Looking at each stock is key because every stock has its own pattern. Trying to understand the market at a whole is quite impossible, but when you narrow it down to just one stock, it is much more doable. For practice, try updown.com(spent most of my time on it during high school) and create 10-100 accounts and use various techniques for each portfolio.   Just from that, you will have much more practice than the majority of traders. It is all very time consuming, but if you truly try on it, you will do better. I have to go(large market drop today, good time to buy).  I'll answer more questions later! I didn't mean to imply that bankruptcy is a magical process. I was using that to clarify my use of conservative vs. aggressive. To be fair, I guess it can vary depending on your perspective. If you're taking the perspective of the debt-laden company, then yes, erring on the side of a higher value could be defined as aggressive. If you're taking the perspective of someone looking to acquire business, I would say erring on the side of a higher value is conservative.   if the debt is trading at, say, $0.20 on the dollar, then yes, I can agree that the market value of the debt is likely more representative of the book value. I guess I wasn't thinking of that type of extreme example. A more common scenario I'd encounter would be a) the debt trading at maybe $0.95 on the dollar and b) taking the perspective of someone looking to invest in the equity, which is why I'd say that it's more conservative to use the higher value, which is the book value.  So I'm persuaded that using market value of the debt can make sense in some cases, but I would still argue that the book value might make more sense in other cases. "If you are looking for numerical metrics I think the following are popular: Price/Earnings (P/E) - You mentioned this very popular one in your question.  There are different P/E ratios - forward (essentially an estimate of future earnings by management), trailing, etc..  I think of the P/E as a quick way to grade a company's income statement (i.e: How much does the stock cost verusus the amount of earnings being generated on a per share basis?). Some caution must be taken when looking at the P/E ratio.  Earnings can be ""massaged"" by the company.  Revenue can be moved between quarters, assets can be depreciated at different rates, residual value of assets can be adjusted, etc..  Knowing this, the P/E ratio alone doesn't help me determine whether or not a stock is cheap. In general, I think an affordable stock is one whose P/E is under 15. Price/Book - I look at the Price/Book as a quick way to grade a company's balance sheet.  The book value of a company is the amount of cash that would be left if everything the company owned was sold and all debts paid (i.e. the company's net worth).  The cash is then divided amoung the outstanding shares and the Price/Book can be computed.  If a company had a price/book under 1.0 then theoretically you could purchase the stock, the company could be liquidated, and you would end up with more money then what you paid for the stock. This ratio attempts to answer: ""How much does the stock cost based on the net worth of the company?"" Again, this ratio can be ""massaged"" by the company.  Asset values have to be estimated based on current market values (think about trying to determine how much a company's building is worth) unless, of course, mark-to-market is suspended.  This involves some estimating.  Again, I don't use this value alone in determing whether or not a stock is cheap. I consider a price/book value under 10 a good number.   Cash - I look at growth in the cash balance of a company as a way to grade a company's cash flow statement.  Is the cash account growing or not? As they say, ""Cash is King"".  This is one measurement that can not be ""massaged"" which is why I like it.  The P/E and Price/Book can be ""tuned"" but in the end the company cannot hide a shrinking cash balance. Return Ratios - Return on Equity is a measure of the amount of earnings being generated for a given amount of equity (ROE = earnings/(assets - liabilities)).  This attempts to measure how effective the company is at generating earnings with a given amount of equity.  There is also Return on Assets which measures earnings returns based on the company's assets. I tend to think an ROE over 15% is a good number. These measurements rely on a company accurately reporting its financial condition.  Remember, in the US companies are allowed to falsify accounting reports if approved by the government so be careful.  There are others who simply don't follow the rules and report whatever numbers they like without penalty. There are many others.  These are just a few of the more popular ones.  There are many other considerations to take into account as other posters have pointed out." Each situation is different, but it has to do with assessing what the Company is trying to do. People always talk about WACC, but in reality, WACC is less important than figuring how how much debt a Company can support (determined by leverage and solvency statistics).  Here are a few things to think about:  -How stable are the Company's cash flows? (big difference between a Company that has multi-year contracts locked in place vs. variable/cyclical revenue streams; what type of Capex requirement is there?)  -What is the purpose of raising the capital? (growth vs. recapitalization; where are the proceeds going?)  -What collateral is available for creditors?  -What does working capital look like? (is there seasonality?) "IANAL (or an accountant), but there is a useful notion of ""technical insolvency"" which you it sounds like you probably meet, and which is a distinct concept from actual insolvency. Couple of choice quotes from that link: If a company (or person) is technically insolvent that merely means   that it has a negative net asset value; its liabilities are greater   than its assets.   The significance of technical insolvency depends on circumstances: it   may be an indicator of serious problems that may lead to actual   insolvency, or it may be perfectly acceptable. ... A technically insolvent company is free to keep trading as long as the   directors reasonably believe that the company will be able to pay its   debts, and, again, as long as an upaid creditor does not use the   courts to force a liquidation. which is basically what @keshlam's comment on your question is saying." Is there one out there that doesn't suffer from massive survivorship bias? Most that I've looked at gather their data from discretionary reporting from the manager themselves, and many stop reporting after bad months when they aren't going to be raising capital anyway. "Thanks for the response.   I am using WRDS database and we are currently filtering through various variables like operating income, free cash flow etc.  Main issue right now is that the database seems to only go up to 2015...is there a similar database that has 2016 info?  filtering out the ""recent equity issuance or M&amp;A activity exceeding 10% of total assets"" is another story, namely, how can I identify M&amp;A activity? I suppose we can filter it with algorithm stating if company's equity suddenly jumps 10% or more, it get's flagged" If the stock has low liquidity, yes there could be times when there are no buyers or sellers at a specific price, so if you put a limit order to buy or sell at a price with no other corresponding sellers or buyers, then your order may take a while to get executed or it may not be executed at all. You can usually tell if a stock has low liquidity by the small size of the average daily volume, the lack of order depth and the large size of the gap between bids and offers. So if a stock for example has last sale price of $0.50, has a highest bid price of $0.40 and a lowest offer price of $0.60, and an average daily volume of 10000 share, it is likely to be very illiquid. So if you try to buy or sell at around the $0.50 mark it might take you a long time to buy or sell this stock at this price. If you've got shares in a company that's filed for U.S. Chapter 11 bankruptcy, that sucks, it really does.  I've been there before and you may lose your entire investment.  If there's still a market for your shares and you can sell them, you may want to just accept the loss and get out with what you can. However, shares of bankrupt companies are often delisted once bankrupt, since the company no longer meets minimum exchange listing requirements.  If you're stuck holding shares with no market, you could lose everything – but that's not always the case: Chapter 11 isn't total and final bankruptcy where the company ceases to exist after liquidation of its assets to pay off its debts.  Rather, Chapter 11 is a section of the U.S. Bankruptcy Code that permits a company to attempt to reorganize (or renegotiate) its debt obligations. During Chapter 11 reorganization, a company can negotiate with its creditors for a better arrangement.  They typically need to demonstrate to creditors that without the burden of the heavy debt, they could achieve profitability.  Such reorganization often involves creditors taking complete or majority ownership of the company when it emerges from Chapter 11 through a debt-for-equity swap. That's why you, as an investor before the bankruptcy, are very likely to get nothing or just pennies on the dollar. Any equity you may be left holding will be considerably diluted in value.  It's rare that shareholders before a Chapter 11 bankruptcy still retain any equity after the company emerges from Chapter 11, but it is possible. But it varies from bankruptcy to bankruptcy and it can be complex as montyloree pointed out. Investopedia has a great article: An Overview of Corporate Bankruptcy.  Here's an excerpt: If a company you've got a stake in   files for bankruptcy, chances are   you'll get back pennies to the dollar.   Different bankruptcy proceedings or   filings generally give some idea as to   whether the average investor will get   back all or a portion of his   investment, but even that is   determined on a case-by-case basis.   There is also a pecking order of   creditors and investors of who get   paid back first, second and last. In   this article, we'll explain what   happens when a public company files   for protection under U.S. bankruptcy   laws and how it affects investors.   [...]   How It Affects Investors   [...]   When your company goes bankrupt, there   is a very good chance you will not get   back the full value of your   investment. In fact, there is a chance   you won't get anything back. [...] Wikipedia has a good article on Chapter 11 bankruptcy at Chapter 11, Title 11, United States Code. What drives the stock of bankrupt companies? The company's potential residual assets. When a company goes bankrupt it is required to sell its assets to pay off its debts. The funds raised from selling assets go to the following entities:  The usual order of debt repayment, in terms of the lender, will be the government, financial institutions, other creditors (i.e. suppliers and utility companies), bondholders, preferred shareholders and, finally, common shareholders. Depending on the amount of debt and the value of a company's assets, the common shareholders may receive some left over from liquidated assets. This would drive the stock price of a bankrupt company. "Edgar Online has this information for companies under SEC regulations and they are reported in ""Form 4"" so that should help guide your search" If the company went bankrupt, the issued public shares that were outstanding at the time most likely were voided, in which case your shares are most definitely gone.  The company might have done a new stock issuance coming out of bankruptcy with a different symbol, and while it could be substantially the same company, it doesn't mean much for you.  It's unfortunate this may be the case, but it is one of the risks of investing. "It's not either or.  Much of the time the value of the stock has some tangible relation to the financial prospects of the company. The value of Ford and GM stock rose when they were selling a lot of cars, and collapsed when their cars became unpopular. Other companies (Enron for example) frankly 'cook the books' to make it appear they are prospering, when they are actually drowning in debt and non-performing assets. So called ""penny stocks"" have both low prices and low volumes and are susceptible to ""pump and dump"" schemes, where a manipulator buys a bunch of the stock, touts the stock to the world, pointing to the recent increase in price. They then sell out to all the new buyers, and the price collapses.  If you are going to invest in the stock market it's up to you to figure out which companies are which."