Tutorial-1 How to know a company has become sick ?

First let's understand what is a sick company? 

1. Sick industrial unit is defined as a unit or a company which is in existence for 5 years or more , and which is found at the end of any financial year to have incurred losses if accumulated from year to year will be equal to or exceed its entire net worth. 

Now you must be wondering what is net worth ? The net worth is calculated as

The net worth is calculated as-

(Paid up share capital + free reserves )    less  (provisions and expenses), as may be prescribed.

2. Also an industrial unit is regarded as potentially sick or weak unit if at the end of any financial year, it has accumulated losses equal to or exceeding 50 per cent of its average net worth in the immediately preceding four financial years and has failed to repay debts to its creditor(s) in three consecutive quarters on demand made in writing for such repayment.

Now another question pops ups in your mind. What in the world are accumulated losses?

To make it simple, If a company incurs a loss in one financial year. Again in next F.Y. it incurs a loss. Then loss of 1st and 2nd F.Y. will accumulate this is known as accumulated losses.

Let's understand the above with the help of  following examples-If a company is incorporated in F.Y. 2011-12.

For point -1 above-

If a company is incorporated in F.Y. 2011-12 and it is making losses so the first condition is that it must be registered for 5 years or more.

Are you curious to know more about sick company. Wait we will bring the next article in a jiffy.