It’s always disappointing to see businesses struggle and sadly the numbers could get worse given the Bank of England’s warning about a big slowdown in the economy and 10% inflation.

The troubles at McColl’s Retail (MCLS) have set the scene for difficult times ahead. The company has gone into administration and shareholders are set to lose everything, even though the business is subsequently being acquired by Morrisons.

This provides a reminder that investors need to check the health of companies in their portfolio. In a rising interest rate environment indebted companies will be under increasing pressure when it comes to servicing their debts, should they have variable rate borrowings. If they need to renegotiate any loans or credit facilities, the cost
of servicing that debt is likely to jump sharply.

McColl’s has tiny operating margins and 2022 earnings forecasts have been fiercely downgraded over the past year. Supply problems and a long struggle to compete against the large supermarkets left the business in mess, and that’s no good when debts are high.

You’re highly unlikely to find examples of companies going into administration for fund portfolios run by the likes of Nick Train and Terry Smith. That’s because they look for quality companies and balance sheet strength is a key attribute they require before considering a stock for their portfolios.

When times are hard, quality companies can ride out the storm because they have the financial strength to cope with short-term shocks. Perhaps you might want to consider increasing exposure to quality stocks in your portfolio?

If the backdrop is so gloomy, it might pay to invest in an insolvency practitioner as their earnings prospects improve if the country is heading towards a recession. FRP Advisory (FRP:AIM) is Shares’ top pick. During the global financial crisis of 2007 to 2009 and again during the Covid pandemic of 2020/2021, the UK government stepped in to help companies in financial distress, which essentially prolonged the life of many businesses.

Support measures are now less pronounced, which suggests a greater number of weak companies could go to the wall. Begbies Traynor’s (BEG:AIM) latest Red Flag Alert report found the number of firms in critical financial distress increased to 1,891 in the first quarter of 2022, almost a fifth higher than the same period last year.

County Court Judgements, which are a warning sign of future insolvencies, were up 157% to 22,552 in the first quarter compared with a year ago. March saw the highest number in a single month for five years.

If you do find one of the companies in your portfolio goes into administration, sadly the investment is likely to be worthless.

A company’s shares will be suspended when it goes down this route and there are no real options for ordinary investors to trade them beyond this point, even if a buyer is found for part or all the business. In most cases the shares will eventually be delisted.

An administrator’s goal is to keep a business trading while it finds a buyer or to reach a deal with creditors by selling the company’s assets. Shareholders are last in line when it comes to claiming any money left on the table.

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