Dictionary › Risk & distress
Going concern
Also called: going-concern warning, going-concern opinion, substantial doubt, ASC 205-40
An accounting warning that a company may not be able to keep operating and paying its bills over the next year without raising money or restructuring.
Explanation
Under US GAAP (ASC 205-40), management must assess every annual and interim period whether conditions raise “substantial doubt” about the company’s ability to continue as a going concern within one year after the financial statements are issued. If they do, the notes must say so, describe management’s plans and state whether those plans alleviate the doubt.
The auditor makes its own evaluation (PCAOB AS 2415) and, when substantial doubt remains, adds an explanatory paragraph to its opinion in the 10-K. That paragraph is what people usually mean by a going-concern opinion.
For a cash-burning small cap the warning usually means one thing: less than a year of cash and a need to raise money. Read the plans paragraph; it often names the intended financing, such as an ATM, an equity line or a sale of assets.
Why it matters
Going-concern language is one of the strongest signs that an offering is coming soon, and it weakens the company’s bargaining position, so the terms are usually worse.
How Equity Dictionary measures it
EDGAR full-text search finds “substantial doubt” with “going concern” in the company’s 10-K, 10-Q and 20-F filings of the last 15 months, and the newest two matches are read. Only the company’s own doubt counts: policy text about borrowers, tenants or customers, hypotheticals (“could raise substantial doubt”) and resolved doubt do not. A finding scores the distress factor 100 and, with under six months of cash, sets a floor of 75. If the search fails, the check reads “unavailable”, never “no”.
Related terms
- Cash runway: How many months a company can keep operating on the cash it has, at its current burn rate, before it must raise more.
- Burn rate: How fast a company uses up cash, usually measured as operating cash outflow per quarter or per month.
- Dilution-risk score: Equity Dictionary’s 0–100 estimate of how much pressure a company is under to issue new stock, built from eight weighted factors.
- Altman Z-score: A formula that combines balance-sheet and income ratios to estimate how close a company is to financial distress.
- Form 10-K and 10-Q: The annual (10-K) and quarterly (10-Q) reports US public companies file with the SEC, containing their financial statements and management’s discussion.
Plain-English summary for research; not legal or investment advice.