The Motley Fool

Forge Group debts at $500 million

How does a company go from $91m in cash, $10m in term deposits and just $14.5m in borrowings to falling into administration, with estimated debts of $500 million?

You’d have to ask the board and management of Forge Group (ASX: FGE) that.

At the end of June 2013, the company showed a net cash position of $78.3 million.

But that has quickly spiralled into debts of close to $500 million, according to the Australian Financial Review (AFR).

Existing shareholders are extremely unlikely to get anything, once creditors have been paid back. ANZ Bank (ASX: ANZ) is the ex-mining services company’s single biggest creditor, with an estimated $200 million exposure.

ANZ took over from National Australia Bank (ASX: ANZ) as Forge’s banker in 2013.

Looks like NAB dodged the bullet on that one!

Taking a brief tour through the company’s last annual report doesn’t show any large debt risks, with finance and operating lease liabilities fairly small, and nowhere near $500 million.

The demise of Forge shows that investors should take ‘stated’ assets and liabilities, as well as profits on the income statement with a grain of salt. It also highlights that computer programs trying to pick stocks by using measures such as high return on equity and balance sheet ‘quality’ don’t work.

MACA Limited (ASX: MLD) may be another to follow in the path of disappointment set by predecessors Coffey International Limited (ASX: COF)Skilled Group (ASX: SKE) and Forge.

Foolish takeaway

The music has stopped and as a sector, mining services companies are rushing to find chairs. As Forge has found out, it was too slow. The resources juggernaut is slowly grinding to a halt, and mining services contracts will become thin on the ground. Those companies that survive will need to take a haircut on their margins.

3 high-risk/high-reward resources tips for your portfolio

Oil, copper, and gold continue to be in high-demand -- and their popularity doesn’t look to be slowing. We've uncovered three companies poised to benefit from the rising prices of these commodities. Get our brand-new report -- "3 Tiny Resources Companies That Could Win Big" -- FREE!

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

NEW. Five Cheap and Good Stocks to Buy in 2019…

Our Motley Fool experts have just released a brand new FREE report, detailing 5 dirt cheap shares that you can buy today.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading near a 52-week low all while offering a 2.8% fully franked yield…

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.