Early Warning Financial Indicators for Companies | Maraz

Early warning financial indicators: why your company sends signals long before it fails

Companies do not fail overnight. Cash is the last thing to run out, and the numbers give warning between 12 and 24 months before there is no money left to pay a payroll. The problem is almost never a lack of signals. The problem is that nobody looks at them, or that they are looked at too late, in last year’s income statement, when the bank has already made its decisions.

After many years working alongside family businesses and mid-market SMEs, the pattern repeats itself with an almost tedious regularity: sales that grow, profit that does not keep pace, customers who pay later every month, a warehouse that keeps getting fatter and credit lines that are always at the limit. By the time the emergency meeting is called, the options are few and expensive. This article explains, without jargon and with examples in euros, which early warning financial indicators to watch, how to calculate them, which thresholds should worry you and what to do when they light up.

In short

• The income statement tells you what has happened; the balance sheet and cash tell you what is about to happen. A dashboard of 15 indicators, reviewed monthly, catches the problem with a year or two to spare.
• The three indicators that flag a crisis earliest are EBITDA-to-cash conversion, the cash conversion cycle and sustained use of credit lines.
• In Spain, 93.5% of the insolvency proceedings opened in 2024 went straight to liquidation, according to the Spanish Registrars’ Association: companies file when there is nothing left to restructure.
• If two indicators have been amber for two consecutive quarters, act: diagnosis, 90-day plan and a conversation with the banks before you breach, not after.

Why the income statement arrives late

The income statement is a rear-view mirror: it shows with precision what has already happened. Profit is recognised when you invoice, not when you collect. A company can sell more, make money on paper and run out of liquidity at the same time, because collection of those sales is delayed and the stock needed to serve them is paid for first. That is the difference between profit and cash, and it is the first lesson of any finance director.

What is more, in many SMEs the income statement is only seen reliably once a year, at the annual close and audit. If the financial year ends in December and the accounts are drawn up in March, management is deciding on information that is between three and fifteen months old. The customer balance, the inventory level or the amount drawn on credit lines, by contrast, can be seen every month, or every week. That is the whole advantage: early warning indicators are not more sophisticated, they are more frequent and they look in the right places.

The deterioration cycle: three phases that always repeat

It is worth understanding the sequence, because it explains why each indicator warns at a different moment.

• Phase 1, operating deterioration. Sales hold or grow, but margin falls: cost increases are not passed on, price is conceded to win volume, or there is too much structure. The income statement still smiles; gross margin no longer does.
• Phase 2, working capital absorbs the cash. To sustain volume, collection terms stretch and stock piles up. Net working capital grows faster than sales, and treasury turns to credit lines and bill discounting to cover the gap. Profit still exists, but it does not turn into money.
• Phase 3, liquidity crisis. Credit lines are at the limit, a bank declines to renew, debt service eats whatever cash is left and deferrals with the tax authority and social security begin. In this phase room for manoeuvre is minimal and the decisions are taken by others.

The indicators in this article are ordered to catch the problem in phase 1 or 2. In phase 3 you no longer need indicators: you need a restructuring plan.

The Spanish context: more insolvencies and slow collections

Recent data give no reason to relax. According to the Spanish Registrars’ Association’s insolvency statistics, the total number of insolvency filings rose 40.3% in 2025, and in the second quarter of 2026 corporate insolvencies were still growing 11.6% year on year. More telling still: the 2025 Insolvency Yearbook shows that the typical insolvent company arrives with a negative operating result and no cash generation, and that more than 95% of the proceedings opened in 2024 ended in liquidation. Companies file for insolvency when the problem is no longer liquidity, but survival.

Late payment remains structural: CEPYME’s Late Payment Observatory put the average payment period at 80.5 days in 2025, 34% above the legal maximum, with a financial cost to SMEs of almost €2 billion in a single quarter. And the Bank of Spain, in its Spring 2026 Financial Stability Report, warns that a fall in profits combined with a one-point rise in the cost of financing would push vulnerable corporate debt up to 32.9%, above the 2012 peak. The aggregate environment is reasonable, but the average hides enormous dispersion, and we have already analysed why companies fail: almost never for the reason in the headline.

The framework: four families of indicators and who watches each one

To avoid drowning in dozens of ratios, group them into four families that answer four questions:

1. Liquidity and working capital: do I have cash for the next few weeks, and how much money is trapped in customers and stock?
2. Profitability: does the business, as it stands, really make money?
3. Debt: can I service the debt with what the business generates?
4. Structure and operating signals: is the company solvent, and is the information I decide on reliable?

Banks look, above all, at repayment capacity. The European Banking Authority’s Guidelines on loan origination and monitoring require lenders to maintain early warning systems with defined thresholds and to assess repayment capacity on the basis of sustainable cash flows. The three usual covenants in mid-sized corporate loans are net financial debt/EBITDA, interest cover and the debt service coverage ratio. Your bank, therefore, already has a traffic light on your company. The question is whether you have your own. In financial covenants we explain how to negotiate them.

A buyer or an M&A adviser looks, in addition, at the quality of earnings: whether EBITDA converts into cash, whether working capital needs are normal for the sector, whether there is customer concentration and whether the numbers are closed on time and without surprises. It is exactly what a Quality of Earnings review examines, and it is worth looking at it before someone else does.

The indicators, one by one

1. Cash and treasury: the most immediate alarms

Cash position net of credit lines. How much money the company really has once what it owes on credit lines is deducted. Formula: cash minus drawn balance on credit lines and overdrafts. Example: €400,000 in the bank and €1,800,000 drawn on credit lines gives a net cash position of −€1,400,000. Reading: if it is permanently negative, working capital is being financed with short-term debt the bank may not renew. The difference between a revolving credit facility and a term loan stops being theoretical the day the facility matures.

Days of cash. How many days the company could pay its outgoings with the liquidity available. Formula: (cash + undrawn limit) / average daily payments. Example: €600,000 available and payments of €50,000 a day is 12 days. Threshold: below 30 days, amber; below 15, red.

Quick ratio. If you had to pay everything falling due this year without selling a single pallet of stock, could you? Formula: (cash + receivables) / current liabilities. Example: €0.4M of cash and €4.6M of receivables against €6.2M of current liabilities: 0.81. Below 1 the company depends on selling inventory or rolling over debt to meet its maturities.

Use of credit lines. Percentage drawn over the limit, as a monthly average. A credit line that never drops below 85-90% is no longer a credit line: it is structural debt in disguise. The signal is not one month’s peak, but the fact that it never comes down in the strong collection months.

Growing bill discounting and factoring. If every quarter more invoices are advanced to reach month-end, the company is consuming its future cushion. Factoring is an excellent tool when it accompanies growth and a trap when it replaces collection.

Delays with suppliers, the tax authority and social security. This is the most serious signal in the family. Deferring VAT or social security contributions “just this once” is usually the first step of a spiral, and it is data that banks and credit insurers pick up quickly. If you are already deferring taxes to pay payroll, you are not in early warning: you are in late warning.

2. Working capital: where the cash hides

Net working capital is the money the business needs to keep tied up in order to operate: receivables plus inventory minus payables. When working capital grows faster than sales, the company is digging a cash hole even while it makes money. It is the tap that looks open and the drain nobody sees.

Days sales outstanding (DSO). Formula: receivables / annual sales × 365. Example: €5M of receivables on €20M of sales is 91 days. Every 10 extra days of collection in a €20M company tie up roughly €548,000 more. Alert: an increase of more than 10 days in a year with no change in commercial policy.

Days inventory outstanding (DIO). Formula: inventory / cost of sales × 365. Example: €3.6M of stock on €14M of cost of sales is 94 days. Alert: sustained growth, especially alongside flat sales. We go into depth in the article on customer, product and range mix: every extra SKU costs twice, in margin and in cash.

Days payable outstanding (DPO). Formula: payables / purchases × 365. Example: €3M on €12M of purchases is 91 days. Careful: a stretching DPO is rarely good negotiation; it is usually a symptom. If you pay later because you cannot pay earlier, suppliers will end up demanding advances or cutting credit.

Cash conversion cycle. Formula: DSO + DIO − DPO. It is the number of days the company finances its own activity. If it goes from 70 to 95 days in two years, the business needs to finance almost one more month of operations, and that month is paid for by the credit lines. Practical threshold: a year-on-year increase of more than 15 days is red, even if each component looks reasonable on its own.

Working capital over sales. Useful for comparing years and benchmarking against the sector. Alert: a rise of more than 3-5 points in a year. In working capital and financial health we give references by type of business.

Slow-moving stock and ageing of balances. Ask every month for two lists: inventory with no movement for more than 180 days and customers with balances more than 90 days overdue. That is where the losses the accounts have not yet recognised usually sit, and where the auditor will recognise them for you.

3. Profitability and margin: the engine of the problem

Gross margin. Formula: (sales − cost of sales) / sales. One point of gross margin in a €20M company is €200,000 of EBITDA. Alert: a fall of more than 2 points in a year without a clear explanation in prices or mix.

EBITDA over sales. Operating profitability before depreciation, interest and tax. More important than the level is the trend, and more important than the trend is the comparison with budget. Profitability ratios are only useful if they are reviewed every month.

Break-even point and margin of safety. Formula: fixed costs / contribution margin in percent. Example: fixed costs of €4.5M and a 30% contribution margin give a break-even point of €15M. If you invoice €17M, your margin of safety is 11.8%. With a margin of safety below 10%, one bad season takes you into losses.

Operating leverage. The more fixed costs, the faster profits fall when sales drop. An industrial company with a heavy structure can lose 30% of EBITDA on a 10% fall in sales; in operating leverage we explain how to calculate yours.

Negative financial leverage. Here is a rule every business owner should have engraved: if return on assets (EBIT / total assets) falls below the average cost of debt, every additional euro of debt destroys value instead of creating it. A company with EBIT of 4% on assets and credit lines at 6% is paying to work. It is the financial leverage effect working against you.

The volume trap. Sales growing at 10% and EBITDA not growing, or falling. It usually hides discounts to win volume, unprofitable customers or costs that are not passed on. Growing this way consumes cash twice over: more working capital and less margin.

EBITDA-to-cash conversion. Formula: operating cash flow / EBITDA. Above 70-80%, healthy. If it has been below 50% for two consecutive years, EBITDA is being left in customers and stock, and reported profit stops being a reliable measure of health. Of all the indicators in this article, it is the one that flags the problem earliest; in free cash flow we explain how to calculate it without a sophisticated ERP.

4. Debt: what the bank watches

Net financial debt / EBITDA. Formula: (bank debt + leases + other financial debt − cash) / EBITDA. Example: €8.4M of net debt and €2.1M of EBITDA is 4.0x. Indicative thresholds for an industrial or distribution SME: below 2.5x, comfortable; between 3x and 4x, watch zone; above 4x, the bank will start to tighten terms, and above 5x the probability of breaching covenants rises sharply.

Interest cover. Formula: EBITDA / financial expenses. Alert: below 3x, amber; below 1.5x, red. It is, in essence, the metric the Bank of Spain uses to define “high financial pressure”: companies whose profit does not cover their interest.

DSCR, debt service coverage ratio. Formula: (EBITDA − taxes − maintenance capex ± change in working capital) / (interest + principal repayments for the year). Example: €1.5M of available cash against €1.4M of debt service gives 1.07x. Below 1.2x any setback forces a refinancing; below 1x the company is paying debt with more debt.

Short-term versus long-term debt. If more than 50% of financial debt matures within a year, the structure is fragile even if the total looks reasonable. It is the classic case of badly structured debt that we describe in corporate debt restructuring warning signs: ten-year investments financed with credit lines that mature every twelve months. In short-term versus long-term debt we explain how to match maturities to uses.

Successive refinancings and accumulated loans. One refinancing is normal management; two or three in a row are a signal. The same goes for participating loans piled up to meet the equity requirement, or for the 2020-2022 state-guaranteed ICO loans whose repayment schedules are now arriving: according to Bank of Spain data reported in the press in May 2026, at the end of 2025 19.7% of the outstanding ICO-Covid loan balance was under special surveillance and 31.1% was already non-performing.

5. Structure and solvency: when the problem stops being financial

Negative working capital. Formula: current assets − current liabilities. In an industrial or distribution company, negative working capital means suppliers and short-term banks are financing long-term assets; in how working capital impacts financial viability there are examples by sector.

Equity below 50% of share capital. Article 363.1.e) of the Spanish Companies Act obliges the company to be wound up when losses reduce equity to less than half of share capital, unless the balance is restored. Example: share capital of €1M and equity of €450,000: mandatory dissolution cause. At this point it stops being a financial matter: directors have two months to call a general meeting and can become personally liable for subsequent debts if they fail to act. We detail it in liability of company directors.

Losses eating into reserves. Even without reaching the legal threshold, watching reserves built up over decades evaporate in two or three years is a clear alarm, and banks read it in the accounts filed at the Commercial Registry.

Altman’s Z-score, explained painlessly. Edward Altman published in 1968 a model that combines several ratios into a single score; in its initial test it correctly predicted 72% of bankruptcies two years in advance. For Spanish SMEs it is best to use the versions for non-listed companies that Altman himself revised in 2000:

• Service and distribution companies (Z''): Z'' = 6.56 × (working capital / assets) + 3.26 × (retained earnings / assets) + 6.72 × (EBIT / assets) + 1.05 × (equity / total liabilities). Zones: above 2.6, safe; between 1.1 and 2.6, grey; below 1.1, distress.
• Industrial companies (Z'): Z' = 0.717 × (working capital / assets) + 0.847 × (retained earnings / assets) + 3.107 × (EBIT / assets) + 0.420 × (equity / total liabilities) + 0.998 × (sales / assets). Zones: above 2.90, safe; between 1.23 and 2.90, grey; below 1.23, distress.

It is not a crystal ball: it is a statistical model estimated on US companies, and in Spain it should be used as a thermometer of trend, not as a verdict. Its great virtue is that it can be calculated in five minutes with data any SME already has, and that it summarises in one number what the other indicators say separately.

6. Non-financial signals: the first to light up

The worst crises usually announce themselves outside the accounts. Doug Yakola, senior partner at McKinsey with almost two decades as a chief restructuring officer, puts it this way: there are some 25 distinct signals of potential trouble, and a company in difficulty is usually dealing with several at once. These are the ones we see most:

The early warning dashboard

You do not need 60 ratios; you need 15 well chosen, reviewed always on the same date and each with an owner. The thresholds below are indicative for an industrial or distribution SME and should be adjusted to each company’s sector and seasonality; the balanced scorecard then adds the commercial and operating indicators.

How to build it without a sophisticated ERP

A well-built Excel sheet and a monthly close within 15 days are worth more than an expensive system nobody looks at. Five steps:

1. Monthly close by the 15th. You do not need year-end precision; it is enough to accrue what matters: depreciation, bonus payments, estimated inventory.
2. One data tab and one traffic-light tab. The trial balance, the receivables ageing and the inventory listing are exported from the accounting system; the formulas calculate the ratios and colour them automatically.
3. Rolling twelve months. Always compare with the same month of the previous year and with the trailing twelve months, to neutralise seasonality.
4. One 60-minute monthly meeting. General management, finance, sales and operations. Only amber and red indicators are discussed, and each one leaves with an action, an owner and a date.
5. The 13-week cash forecast, updated every week, is the most valuable tool of all when things go wrong. In how to build an effective financial forecast we explain how to construct it, and in rolling forecast how to turn it into a routine.

Case study: how the indicators gave 20 months’ warning

Illustrative case, with a fictitious company and figures.

Componentes Metálicos del Mediterráneo, S.L. is a second-generation family industrial company with 110 employees that manufactures components for the furniture and construction sectors. In three years it went from €20M to €24M of revenue and the board celebrated the growth. In the fourth year, mid-way through the financial year, its main bank declined to renew a €1.5M credit line, a major customer stretched its payments and the company could not meet two payrolls without deferring social security contributions.

What the numbers were saying, and nobody read:

At the close of year 2, some 20 months before the crisis, five indicators were already amber: gross margin −3 points, EBITDA-to-cash conversion of 40%, net debt/EBITDA at 4.0x, credit line usage at 75% and Z’ in the grey zone. The income statement, however, showed a profit and record sales, and the board was discussing an extension to the plant.

The growth had been bought with price and with terms: discounts to get into two large distributors and collections at 90-120 days. The cash cycle lengthened by 25 days; on €24M of sales that is more than €1.6M extra trapped in working capital, financed with credit lines. The 98-day DPO was not good negotiation: it was the company paying late, and two key suppliers demanded advances in year 3.

In year 3 everything was red, but the monthly close was arriving three months late and the conversation with the bank took place after the 3.5x net debt/EBITDA covenant had already been breached.

What could have been done in year 2: review profitability by customer and give up the volume with negative margin; liquidate the slow-moving stock (almost €1M); convert credit lines into a five-year term loan while the ratios were still defensible; and set up a 13-week cash forecast. With 20 months in hand it was an adjustment; with 4 months it was a restructuring.

What to do when the alarms go off

First, the diagnosis: profitability or liquidity?

A liquidity problem is not the same as a profitability problem, and confusing them is expensive. If the business is profitable but working capital has ballooned or the debt is badly structured, the problem is liquidity: it is solved with working capital management and a refinancing at the right maturities. If the business does not generate enough margin, refinancing only buys time: prices, mix, costs or perimeter have to change. The quick test: if, with the cash cycle of three years ago, the company would have plenty of cash today, the problem is liquidity; if not even then, it is profitability.

Horizon 1: the 90-day plan

1. Weeks 1-2, cash control. A 13-week cash forecast with actual receipts and payments, reviewed weekly. Centralise payment authorisation. Define the minimum cash level below which the company cannot operate. Freeze non-essential capex.
2. Weeks 2-6, working capital. Collection campaign on overdue balances, review of customer terms, liquidation of obsolete stock, purchases aligned with real demand. It is the fastest and cheapest money there is.
3. Weeks 3-8, costs and profitability. Profitability by customer, product and channel; selective price increases; cuts to non-essential fixed costs.
4. Weeks 4-12, banks. Talk to your banks before you breach, not after. Arrive with a diagnosis, a cash forecast and a plan with numbers. A bank that receives bad news together with a plan has room to help; one that finds out through the credit bureau or a missed payment does not. In what banks expect to refinance a company’s debt we list what to bring to that meeting.

It is exactly the script we follow in the fractional CFO and liquidity crisis management in 90 days.

Horizon 2: restructuring the liabilities (3-12 months)

If net debt/EBITDA or debt service prevent normal operation, the 90-day plan is not enough: the liabilities have to be reorganised. Three levers, in this order: refinance bank debt by extending maturities, with grace periods that match real cash generation; renegotiate covenants pre-emptively, before a breach triggers an acceleration; and replace short-term debt with long-term financing, including alternative lenders or a sale & leaseback of the premises if there are any. We develop it in refinancing companies in distress and in the role of the independent business review (IBR) that banks ask for before sitting down to negotiate.

Horizon 3: changing the perimeter (strategic)

When viability requires structural change, the options are corporate: bringing in a financial or industrial partner through a capital increase, selling business lines or non-core assets to concentrate resources on what is profitable, or selling the company while it is still worth something. These are strategic restructuring decisions, and they are best taken with the company in the grey zone, not the distress zone: a buyer pays for a business with liquidity problems; for one in insolvency proceedings, almost nobody does. We explain how in distressed M&A.

The pre-insolvency tools, in a few words

Spain’s 2022 insolvency reform (Law 16/2022) brought forward the moment at which a company can protect itself. Three basic ideas:

• Likelihood of insolvency. The law allows action when it is objectively foreseeable that, without a restructuring plan, the company will be unable to meet the obligations falling due in the next two years. In other words, the law gives a two-year horizon, exactly the period over which the indicators in this article give warning.
• Notice of the opening of negotiations. The company informs the court that it is negotiating with its creditors; the main effect is a temporary stay of enforcement against assets needed for the business, for three months, extendable.
• Restructuring plans. Agreements with creditors (extensions, haircuts, debt-for-equity swaps, operating changes) which, once sanctioned by the court, can be extended to dissenting creditors.

These tools require specialist legal advice, but they only work if you arrive in time: with cash to operate during the negotiation and with a business that still generates margin. In how to avoid insolvency proceedings and in business crisis and restructuring options we explain the full sequence.

Summary: what to do in each zone

The role of the fractional CFO

Many SMEs with revenue between €5M and €100M do not have a finance director with experience of stressed situations, or have one absorbed by accounting and tax. A fractional CFO brings three things: building the dashboard and the cash forecast in weeks, not months; translating the numbers for management and the family board; and sitting down with the banks with credibility and with a plan. In the CFO’s role in rapid growth phases we explain why it pays to bring one in before you need one.

Mistakes we have seen far too often

• Looking only at the income statement. Profit can grow while cash sinks.
• Closing the accounts three months late. Managing on data a quarter old is driving by the rear-view mirror.
• Confusing profit with cash. Selling is not collecting.
• Financing working capital with long-term debt, or investments with credit lines. The first hides an operating problem; the second turns an investment into a liquidity risk every time the facility matures.
• "It will sort itself out with this season’s sales." If the season goes well you will need more working capital; if it goes badly you will have lost six months.
• Waiting for the bank to ask. When it asks, it has already done its sums.

Conclusions: five decisions for this quarter

1. Build a dashboard of 15 indicators with green, amber and red thresholds, and review it every month on the same date.
2. Close the accounts by the 15th of the following month, even with reasonable estimates.
3. Implement a 13-week cash forecast and update it every week.
4. Watch EBITDA-to-cash conversion and the cash cycle: they are the indicators that give the problem away first.
5. If two or more indicators have been amber for two quarters, act: diagnosis, 90-day plan and a conversation with the banks before you breach.

At Maraz Corporate Finance we help family businesses and mid-market SMEs implement these dashboards as fractional CFO and, when necessary, prepare and negotiate refinancings and restructurings. The best restructuring is the one that is avoided because somebody looked at the indicators in time. If you want to know which zone your company is in, let’s talk.

Javier de Rojas Roca de Togores

Partner - Maraz Corporate Finance

FAQs on early warning financial indicators

Which is the single most important early warning indicator for an SME?

If you could look at only one, look at EBITDA-to-cash conversion: operating cash flow divided by EBITDA. It is the only indicator that combines profitability and working capital in a single figure, which is why it warns before any other. A company can have growing EBITDA and still convert less than 50% of it into money because sales are being left in receivables and stock. When that happens two years running, reported profit has stopped being a reliable measure of health.

Second on the list is the cash conversion cycle: if it grows by more than 15 days in a year, the business is financing almost half a month more of activity with credit lines. Neither requires a sophisticated ERP; both come out of the monthly balance sheet.

How much warning do the indicators really give?

Between 12 and 24 months, in our experience, and Spain’s Insolvency Act assumes as much: it defines “likelihood of insolvency” as the objective expectation of being unable to meet the obligations falling due in the next two years. The first to light up are gross margin and EBITDA-to-cash conversion (operating phase); then the cash cycle and credit line usage (working capital phase); and lastly interest cover, DSCR and delays with suppliers and the tax authority (liquidity phase). The lead time depends on frequency: with a monthly close by the 15th the window is two years; with an annual close in March, a few months. Altman’s original Z-score model correctly classified 72% of bankruptcies two years in advance.

What is the difference between a liquidity problem and a profitability problem?

A liquidity problem is having a business that makes money but does not have it available: working capital has grown, debt matures before the business generates the cash, or an investment was financed with credit lines. It is solved with receivables and stock management and with a refinancing that matches maturities to uses. A profitability problem is that the business, as it stands, does not earn enough: eroded gross margin, oversized structure, customers that destroy value. Refinancing only buys time; prices, mix, costs or perimeter have to change.

A quick test: if, with the cash cycle of three years ago, the company would have plenty of cash today, the problem is liquidity; if not even then, it is profitability. Confusing them is the costliest mistake, because it leads to refinancing a company that is not viable or to cutting costs in one that only needed to collect sooner.

When should I talk to the banks?

Before you breach, never after. A bank that receives bad news together with a diagnosis, a 13-week cash forecast and a plan with numbers has room to help: grace periods, longer maturities, converting credit lines into a term loan. A bank that finds out through the credit bureau, a missed payment or a credit line that never drops below 90% has already classified the risk and reduced its options.

The concrete moment is when two or more indicators have been amber for two quarters, or when the projected DSCR for next year falls below 1.2x. If the situation already calls for a formal restructuring plan, the bank will ask for an independent business review (IBR); arriving with it prepared saves months.

Is Altman’s Z-score useful for a Spanish SME?

It is useful as a thermometer, not as a verdict. It is a statistical model estimated on US companies, and applied to a Spanish SME it can misfire in highly asset-intensive or strongly seasonal sectors. Its great advantage is that it summarises in one number what five ratios say separately, and that it can be calculated in five minutes from the balance sheet.

Use the Z’ version if your company is industrial (distress zone below 1.23) and Z’’ if it is in services or distribution (distress zone below 1.10), and watch the trend more than the value: a company that goes from 2.6 to 2.0 to 1.4 in three years is telling you something, even if all three figures sit in the grey zone.

What do I do if my equity has fallen below half of share capital?

Act within two months, because it stops being a financial matter and becomes a legal one. Article 363 of the Spanish Companies Act obliges the company to be wound up unless the balance is restored, and directors who fail to call a general meeting within that period can become personally liable for subsequent debts. The usual routes are a capital increase, a simultaneous capital reduction and increase (the “accordion” operation), a participating loan, which counts as equity for this purpose, or the capitalisation of shareholder debt.

What matters is that the equity remedy comes with a plan that fixes the cause: if the losses continue, the problem will be back within a year. If the company is also unable to meet its obligations, the pre-insolvency tools of Law 16/2022 should be assessed in parallel.