Essar Shipping Limited — financial distress indicators

Total liabilities are 7.54× total assets.

Balance-sheet insolvency test: debts exceeding the fair value of assets is the statutory definition of net-worth erosion; under the Companies Act 2013 it is a recognised sign of financial sickness.

Interest coverage (EBIT / interest) is -0.18×.

When EBIT < interest, debt service is funded from cash reserves or new borrowing — the classic precursor to payment default and covenant breach.

At the current free-cash-flow burn, cash covers ~0 months.

Going-concern standard: management must assess ability to continue for 12 months (Ind AS 1 ¶25–26). Runway below that horizon forces dilution, asset sales or default.

Merton distance-to-default -0.34 σ → PD 63%.

Structural (Merton/KMV) model: equity is a call option on assets; low distance-to-default means assets are close to the default point.

Current ratio is 0.05 (current assets cover 5% of near-term obligations).

Cash-flow insolvency test: inability to pay debts as they fall due is the trigger for both U.S. involuntary petitions and Indian IBC default.

Revenue changed -83% year over year.

A >30% sales drop typically breaches leverage covenants and starves fixed-cost coverage.

Debt is 510% of assets while EBITDA is not positive.

With no operating earnings, repayment depends entirely on asset sales or fresh capital.

Operating cash flow negative in 2 of the last 3 years.

A business that cannot fund itself from operations depends on external capital to survive.

O-score 30.00 → model probability 100%.

Ohlson (1980) logit model of 1-year corporate failure; O > 0 (p > 50%) is the original failure cut-off.

Recurring net losses.

Repeated losses are a core input in both Ohlson and Altman failure models.

Price is -61% from its 52-week high.

For financial firms a share-price run often precedes a deposit or funding run (confidence channel).

Operating margin fell from -737% to -942% in two years.

Sharp margin compression signals loss of pricing power or cost control.

Revenue declined every year for three years.

Structural, not cyclical, decline.