What Is a Turnaround?
Let me explain what a turnaround really means. When a company that's been struggling through a tough period starts to recover financially, we call that a turnaround. This term also applies to an entire nation's or region's economy bouncing back from recession or stagnation. On a personal level, it can describe someone whose finances improve after hitting rock bottom.
Key Takeaways
- A turnaround is the financial recovery of a poorly performing company, economy, or individual.
- Turnarounds are crucial because they signal improvement and bring stability to the entity's future.
- To achieve a turnaround, the entity must recognize problems, evaluate changes, and execute a problem-solving strategy.
How to Affect a Turnaround
You should understand why turnarounds matter—they represent an upward shift after a long stretch of negativity, essentially restructuring to turn losses into profits and secure a stable future. In the investing world, turnaround can also refer to the time it takes from placing an order to its fulfillment.
Turnarounds occur at various scales, from personal finances to global economies, indicating a phase of consistent positive recovery after decline. The initial step is always acknowledging the issues causing the downturn. For businesses, this might involve management changes or new problem-solving approaches. In extreme cases, liquidation could be the most practical option.
Special Considerations
Certain signs typically point to an entity needing a turnaround. For a business, these include falling stock prices, employee layoffs, and revenues that fail to cover creditor payments. Shifts in competitive advantages or outdated products and services are other red flags that demand turnaround strategies. Poor resource management, like mishandling labor or capital, adds further strain.
If you're a stock speculator, you could profit by predicting a company's improvement during its turnaround phase.
Catalysts for a Turnaround
Turnarounds rarely happen alone; they're driven by internal and external forces. Internally, focus shifts to fixing processes, spending, management, and other decline-causing factors. Externally, things like new regulations might lower production costs and boost profits. A turnaround management team assesses failure causes and creates a strategic plan, possibly involving restructuring or repositioning the business.
Example of a Turnaround
Consider the U.S. economy's recession in 2009, triggered by the subprime mortgage crisis and housing bubble collapse, which toppled major banks worldwide. Recovery began about a year later, thanks to federal bailouts and a stimulus package.
In the auto industry, declining sales and tight lending for car purchases hammered revenues and earnings. General Motors (GM) faced bankruptcy in 2009, leading to its stock delisting. Bailout funds and reorganization restored production and sales, and by 2010, GM's stock was trading again with stronger performance.
Other articles for you
The Fair Debt Collection Practices Act (FDCPA) protects consumers from abusive, deceptive, and unfair practices by third-party debt collectors.
A Normal-Course Issuer Bid (NCIB) is a program allowing Canadian public companies to repurchase and cancel their own shares to manage stock value and control.
Wealth is the accumulation of valuable assets minus debts, measured in absolute or relative terms to define prosperity.
Carried interest is a profit-sharing mechanism for fund managers that aligns their compensation with fund performance and is often taxed at lower capital gains rates.
Roll-down return is the potential profit from a bond's price increasing as it approaches maturity on a stable yield curve.
Hammering refers to the rapid selling of stocks following unexpected negative events, causing sharp price declines, with potential for recovery as seen in patterns like the hammer candlestick.
A debt/equity swap exchanges a company's debt for equity to help manage financial distress and improve its balance sheet.
Leading indicators are measurable data points that help predict future economic trends before they occur.
A waiting period is the time an insured must wait before coverage starts and benefits can be claimed.
Environmental economics studies the efficient use of natural resources while balancing economic growth and environmental protection through policies addressing externalities and public goods.