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Chapter 16. Value Investing: The Process > Step 7: Financial Health

Step 7: Financial Health

The purpose of evaluating financial strength is not to determine if the company has the ability to develop new products and regain its market share. Rather, it's to determine if it can survive long enough to carry out a recovery strategy.

Firms running into financial difficulties fall in one of two categories: busted cash burners and overburdened debtors. Busted cash burners are typically newer companies, while overburdened debtors are usually well-established, formerly profitable firms. Value candidates are more likely to be potentially overburdened debtors than potential busted cash burners. Potential busted cash burners can be evaluated using the Busted Cash Burners analysis, while potential overburdened debtors require the Detailed Fiscal Fitness Exam.


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