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What can we learn from the NMC Health collapse?

I’ve seen plenty of company collapses during my years as a private investor. But it’s rare it happens to one that’s made it as far as the FTSE 100. That’s what’s happened to NMC Health (LSE: NMC), and there are lessons to be learned.

At its peak in 2018, NMC Health stock was trading at more than £40 per share. Now on Monday, the end of NMC as a listed company has come, after it requested the cancellation of its shares on the London Stock Exchange.

On 13 April, NMC Health announced it had called in the administrators, under pressure from Abu Dhabi Commercial Bank, to which it owed $1bn. That was a month after trading in the shares had been suspended, at a price of 938p. What are they worth now? I reckon almost certainly zero.

NMC Health in administration

My Motley Fool colleague Edward Sheldon has explained how a company entering administration is bad news for shareholders. The company’s creditors and bondholders are ahead in the queue. And if there’s anything left of its assets once its debts are dealt with, only then might shareholders be left with anything.

I seriously doubt there’ll be anything left, as the scale of NMC Health’s debts is truly shocking. It includes previously undisclosed debt of $4bn, for a total debt pile of more than $6.5bn.

Lesson number one

And here’s one lesson for investors. We might wonder how this can happen to a company regulated by the LSE with a FTSE 100 listing. And we might wonder if LSE auditing regulations are too lax. But the thing is, a company’s auditors are working on the company’s behalf. And unless they find anything glaring, they have to take a lot of what the company says in good faith.

The auditors aren’t being paid by the company to perform an in-depth investigation to look for wrongdoings. So don’t assume that just because a company is in the FTSE 100, its accounts must be squeaky clean.

Shorting NMC Health

It’s different for investigative investors such as Muddy Waters, which essentially pulled the plug on NMC Health in December. Back then, Muddy Waters said it believed NMC had “manipulated its balance sheet to understate debt,” having taken a short position against the firm.

And that leads me to lesson number two. A firm like Muddy Waters has to have a pretty tight case to make such potentially devastating claims. And it has a reputation for first-class investigative skills. In my view, it’s going to be very rare Muddy Waters will get something like this wrong. So the lesson I take is — if Muddy Waters says a company’s bad, run for the hills.

The signs were there

Now we know the scale of the debt understatement, Muddy Waters has been well and truly vindicated. Shareholders who heeded December’s report and sold out saved themselves from total wipeout. And, as it happens, NMC Health chairman BR Shetty and vice-chairman Khalifa Al Muhairi dumped a load of shares in January and February.

So, final lesson. When a company is up to its neck in trouble and key insiders are selling, well, I think you know the rest.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended NMC Health. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.