Drama for investors


After years of restructuring and re-births, today, Ten Network Holdings Limited (TEN) was put into Voluntary Administration following a failed $200 million restructure program for the network.

While many will point to a changing media landscape and consumer tastes, the events that led to TEN’s downfall were established many years ago. Investors needed to look no further than the company’s Financial Health to understand the true level of risk they would have been exposed to.

Background

Ten Network Holdings Limited (TEN) first listed on the stock exchange back in 1998. It owns the rights to the Ten Network. The Ten Network has had its fair share of troubled owners over the years since first airing in 1964 in Melbourne. The latest drama was a result of the company not being able to source funding to restructure a looming overdraft due to be paid in December 2017. Major shareholders; Messrs Murdoch, Packer and Gordon were asked to help but refused. Financiers took a similar vein. TEN joins the roll call of popular brand names whose reputation was not supported by the strength of fundamentals.

Costly investment

While the changing media landscape is seen as a major reason why TEN failed, the reality is that the company has been walking a financial tightrope for some time. In fact, according to Lincoln Indicator’s Financial Health Score, TEN has been exposed to unacceptable levels of financial risk since it published its 2012 Annual Result in August at a price of $2.96.

In that time, a number of well-known and high-profile financiers have come and gone trying to resurrect the ailing business. Yet the deteriorating fundamentals were a bridge too far to cross, with the stock last trading before its failure at $0.16 with a “Distress rating” according to Lincoln Indicator’s Financial Health Methodology.

That is not to say that TEN did not, once upon a time, possess strong fundamentals. In fact, TEN was once a Stock Doctor Star Growth Stock, last holding that title in 2006 at the lofty price of $22.18 (post diluted basis). But the disappointing news from TEN today is a timely reminder to all investors that, when a company exhibits deteriorating fundamentals, it is best to immediately act with discipline in the best interest of the portfolio.

The risks were clear

As mentioned earlier, the demise of TEN was seen some time back. Initially it started with a drop-off in operating cash flow, (our Operating Cash Flow to Total Tangible Assets (OCFTAI) ratio and our Operating Cash Flow to Current Liabilities (OCFCL) ratio). Both went to unacceptable levels following the August 2012 result and exposed the business to an immediate risk. Then, over the subsequent years, a death spiral occurred when rising debt levels were supported by negative operating cash flows, until such a point that the rising debt burden could not be supported. Both investors and financiers had finally run out of patience.

Another lesson for the unsuspecting investor

While the factors that ultimately led to the demise of TEN will be discussed over the coming days and weeks, one need not look too much further than a set of poor indicators such as Financial Health and deteriorating fundamentals.

While many investors are lured to ‘big name’ companies, and will often look to well-known shareholders as evidence of a possible opportunity, at the end of the day, the share price of the stock will revert to its quality. And if the fundamentals are not there to support it, then no level of prime-time marketing can keep gravity from doing its thing. This is a fact that over 17,000 small shareholders in TEN would have learned today.

Therefore, we re-iterate our view that unless investors understand the true Financial Health of the companies they’re invested in, then they are purely speculating and seriously risking financial loss. And, in the case of TEN, it was simply a case of “Pot Luck.”

Avoiding such disasters is easy with Stock Doctor

Voluntary administration is every shareholders’ worst nightmare. While such events are regrettable, they are avoidable. The collapse of Ten Network Holdings Limited is a timely reminder that investing in the share market can be risky for those who invest blindly and do not understand the true Financial Health of the businesses in their portfolios.

Prevention is ALWAYS better than cure. The example of TEN highlights the importance of Financial Health as an essential first step in assessing the risk and future prospects of a company.

Since its inception, Stock Doctor has accurately identified 94% of all corporate failures prior to their demise, often many years before their failure. Stock Doctor delivers the only research service that identifies the true Financial Health of all 2000+ companies on the ASX; providing the control, confidence and peace of mind to construct and manage a rock-solid portfolio of the healthiest businesses on the Stock Exchange.

To learn more about how Lincoln Stock Doctor can help you easily avoid potential disasters such as TEN then contact one of our specialist consultants on 1300 676 333 or enquiries@lincolnindicators.com.au 

(Editor’s note: Do not read the following ideas as stock recommendations. Do further research of your own or talk to a financial adviser before acting on themes in this article).

 

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