Evaluating a Micro Cap Company’s “Going Concern Assumption”

In publicly traded micro cap companies, as in life, death is a concern. While working with Investor Relations Firms, Publicly Traded Micro Cap Companies and Venture Capitalist; I attended a micro cap conference where smaller public companies present and Wall Street Investors convene to network and deal.  While at one of these conferences, I asked a representative of a public company (valued at about $10 Million, and with little-to-no-revenue) if he thought his company was “A Going Concern”…he like almost every CEO or company pitch-man will say “Yes”.  But in the micro cap sector (and even larger market cap sectors) this question can be answered via analysis from external sources.  Let’s look at a basic definition of what a “Going Concern” is…

A going concern is a business that functions without the threat of liquidation for the foreseeable future, usually regarded as at least within 12 months. It implies for the business the basic declaration of intention to keep running its activities at least for the next year, which is a basic assumption to prepare financial statements considering the conceptual framework of the IFRS. Hence, the declaration of going concern means that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations.

 In other words a company is considered a going concern if there is no evidence that the company will have to liquidate it’s position within the next 12 months to maintain financial solvency.  The easiest way to evaluate a company, to assure it is a going concern, is to hire a professional accounting firm to audit the company. But if you are not in the position to do this, here are a few tips to evaluate whether a company will remain solvent for the next 12 months (on the public markets):

• Reviewing Company Filings with Securities Agencies, Courts, State Governments etc.
• Calling and Interviewing Company executives, consultants, accountants and agents.
• Evaluating company sales, market space and sector.