The Words You Never Want to Hear From a Turnaround CEO

If you are invested in a company that’s attempting a turnaround or has just hired a new CEO to fix the business, carefully watch the CEOs words. If you hear them tell shareholders that the solution for the company’s troubles is to just focus on sales growth be very cautious. Almost all successful turnarounds occur through downsizing to a profitable core, not through growing sales.

In all of the turnarounds I have taken on or invested in you will always find numerousskus, services and even whole product lines that are losers. One of the CEOs first action should always be to measure sku profitability by carefully allocating all direct and indirect costs to the products. Then measuring the return on those sales by comparing profits to the working capital and assets used to produce those sales. If the ROIC is low or negative the CEO should institute a price increase immediately to raise returns to an acceptable level or discontinue the sales. Without performing this calculation the CEO will ironically be making things worse growing sales. This is why companies in trouble become more profitable as sales decline to the core business. So when you hear a CEO claim that he will grow out of the problem sell your shares.

If you’re interested in learning how to find, buy and manage a portfolio of turnaround stocks, consider becoming a member of turnaround stock investing premium membership service.