The titles of several famous Raymond Chandler novels are euphemisms for death. At the top of the list, there's The Long Goodbye and The Big Sleep. (Poodle Springs less so, but who really knows?)
The Big Bath kind of falls into that category.
Think of the guy in The Godfather II, who, after seeing his brother in the audience of a Congressional hearing and having a seemingly anodyne conversation about the Roman Empire, decided to slit his wrists in the bath (it makes sense in the context of the movie). That's a Raymond Chandler-style Big Bath.
Now imagine the guy in The Godfather II is a company. That company is having a bad year. Rather than do everything they can to bolster the terrible results, management instead turns into the skid. They take write downs. They accelerate losses. They do everything they can to make the current period look as bad as possible.
This has two effects. If they pick the right moves, they can clear the decks and move more profitably into the future. But secondly, even if this doesn't entirely work, at least future results will look stronger compared to the "big bath" they took already.
So, unlike the Godfather guy, the plan is to get up and start walking around again. But at the time, it feels about the same.
Related or Semi-related Video
Finance: What is the Going Concern Rule?5 Views
Finance a la shmoop what is the going concern rule? I'm concerned that we're
still going are we dead yet can we still pay our bills any major [Zombie man discussing going concern rule]
contracts we're losing that will kill us any regulations coming that will also
kill us so we ask again are we dead yet? okay not quite a fair comparison there
when companies have to ask the question as to whether or not they are a going
concern well something is very rotten in Denmark like Google's not asking those
questions a going concern is one which is going living surviving even thriving [Pink rabbit playing drums]
and if they're not well then a whole lot of bad things start to happen so let's
say a given company has debt and one of the basic covenants is that their debt
has to have a debt to asset ratio of no more than 3x but then they invested in a
Chinese gambling company five years earlier which has done amazingly well [Chinese slot machine appears]
and that asset balloon and ballooned in value upwards the good way and the
company borrowed money against it as collateral
using the valuation of its last private round of funding to peg the value of
that asset okay debt to asset ratio remember got to be three but of course
as things always do in shmoop finance videos the Chinese gaming company was
hacked then it fell on hard times and it was regulated and eventually became an
impaired asset and that asset was no longer a going concern and that's a big
fat hairy problem for the company that was using that stock in that company as
an asset or collateral against which to cover its bond covenants when that
Chinese gaming asset became an impaired asset going in value from 50 million to [Chinese gaming company stock value graph appears]
like two million. The hundred fifty million dollars in debt covenants were
violated as the total assets owned by gambool went from seventy million dollars
down to just 22 million so what happens now?
well the bonds are by indenture immediately callable by the lenders and [Bond stamped callable]
it's unclear as to whether the company can quickly raise enough cash to cover
that debt that they owe... like they owe 150 million
bucks and the value of this thing's 22 so they quickly need to have 28 million
in cash or some asset that can be pledged against it so it doesn't violate
that 3 to 1 covenant got it? so it's as if the financial disease that hit the
Chinese gaming company has now leaked and infected the one that had invested
in it as now with that 28 million in change urgently needed the investing
companies own solvency is called into question yeah that's how we get to the
going concern rule which just focuses on the notion of whether a company is going
along just fine generally and that huge cataclysmic things like debt write downs
and bankruptcy aren't in the immediate offing at its essence going concern [Pink rabbit playing concern drum]
means that a company can continue to go or operate they can pay their bills good
economy or bad one contract or loss they're generally immune to minor
regulatory changes and any kind of debt they have or other production
obligations the timeframe for determining whether or not there is [Timeframe for companies cause for concern appears]
cause for concern that is going is usually a year from when the financial
statements are released that is if a company has had five hundred million
dollars in earnings before interest paid and then they pay four hundred million
dollars in interest payments well, they have only a hundred million dollars
of spread there but if suddenly their earnings drop another 20 percent well [Company earnings drop]
then their existence is likely called into question because basically all of
their pre-tax profits is going to pay down debt if revenues drop even another
little tiny skosh well then they're bankrupt and they're no longer a going
concern and well then investors would be concerned that they can no longer yo
know, go [TV advert for prunes appears]
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