by Wyatt Atkins

Created on: October 14, 2008   Last Updated: October 15, 2008

There are many ways to categorize companies and many ratios and indexes that help investors make informed choices. In fact, all financial ratios that you can read on any analyst's report try to give a better understanding of some aspect of the overall financial picture of the underlying company. But in troubled times, things change considerably. To put it mildly, "value at risk" valuations, for example, lose much of their relevancy and beta, usually a more or less reliable indicator, now loses its touch with reality. Greater forces are at work!

When people lose (or seem to lose!) their faith in financial markets for a given period, as is sometimes the case, then the mechanism of valuation, which basically tells us what an asset (or a company in our case) will be worth at a given point in time in the future, is basically unreliable, as investors' minds are clouded by what is happening right now - or, even better, by their perception of what is unfolding before them. And in fact they are quite right in behaving that way: a company may have the best product or service to sell, but if it doesn't make it to tomorrow, then there won't be any sales, period.

When things go well, there is plenty of money to go around: banks search for ambitious projects and promising companies; lend them money to go about their business or research; help them to buy other companies. Companies take on debt, hoping (and many times achieving!) a good return on the money invested or borrowed. When things turn for the worse, the same institutions, trying to come to terms with their own liquidity problems, not only stop lending, but they also start asking for some or all of their money back. The wisest course of action then is to use your own money and resources, till things get better again.

But the thing is, you can't do that if you are already loaded with debt; and since borrowing is becoming increasingly difficult, companies carrying a lot of debt are less likely to survive in a hostile financial and business environment. On the other hand, companies with an adequate free cash flow and considerable cash at hand can continue not only doing business as usual, but also start capturing the market share of their failing competitors. Markets never die; crises are the perfect opportunity to reshuffle the deck. Some companies fail the test and are cast into oblivion, some get leaner, better and eventually bigger - and that's why it always pays to remain in the market, assuming you can pick the apples

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