We have to remember that businesses don’t go bankrupt because they’re unprofitable. Businesses go bankrupt because they’re unable to make payments on their debt. The two are related, but not identical. It’s possible that Hertz, as a company, is fundamentally solvent, but was caught out by a combination of high debt load and a sudden shortfall in cash flow. We’ve seen the same with airline bankruptcies in the past. The business can be fundamentally profitable, but a combination of thin margins and high capital requirements means that any sudden shortfall in cashflow means bankruptcy as the business is suddenly unable to make payments on the loans that it has taken out. The bankruptcy process (Chapter 11 bankruptcy protection) is designed to give legal protection to a business so that it can renegotiate its loans and emerge as a functional business without being liquidated.
I haven’t run the numbers on Hertz myself, but it did seem to be a profitable business before the coronavirus pandemic caused all travel to basically go to zero. It’s entirely possible to think that, at some point, the pandemic will end, and at that point people will want to start traveling and renting cars once again. Buying Hertz shares now, when they’re almost valueless, is a cheap way to bet that a recovery will occur.
We have to remember that businesses don’t go bankrupt because they’re unprofitable. Businesses go bankrupt because they’re unable to make payments on their debt. The two are related, but not identical. It’s possible that Hertz, as a company, is fundamentally solvent, but was caught out by a combination of high debt load and a sudden shortfall in cash flow. We’ve seen the same with airline bankruptcies in the past. The business can be fundamentally profitable, but a combination of thin margins and high capital requirements means that any sudden shortfall in cashflow means bankruptcy as the business is suddenly unable to make payments on the loans that it has taken out. The bankruptcy process (Chapter 11 bankruptcy protection) is designed to give legal protection to a business so that it can renegotiate its loans and emerge as a functional business without being liquidated.
I haven’t run the numbers on Hertz myself, but it did seem to be a profitable business before the coronavirus pandemic caused all travel to basically go to zero. It’s entirely possible to think that, at some point, the pandemic will end, and at that point people will want to start traveling and renting cars once again. Buying Hertz shares now, when they’re almost valueless, is a cheap way to bet that a recovery will occur.