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Chapter 10. Beyond Their Means: Balance ... > Red Flag 10: When a Company Is Rapid...

Red Flag 10: When a Company Is Rapidly Burning through Its Cash

When a company is consistently recording losses and there is little sign of a turnaround, the amount of cash it has becomes critical. During the Internet bust, the media, led by Barron’s, kept a death watch on companies that showed little evidence of ever recording a profit, with the rate at which they were burning through their cash the key indicator. It is remarkable how quickly a troubled company can burn through a pile of cash. In a report in September 2002, Merrill Lynch estimated that telecommunications equipment maker Lucent Technologies would have only $600 million cash left by the end of 2003 and $300 million by September 2004—compared with $5.4 billion at the end of June 2002. That drop leaves it little room to maneuver. Lucent, which has been plagued by losses in recent years, would burn through the cash because of further losses, restructuring costs, short-term borrowing repayments, interest and dividend costs, and capital spending.


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