How to tell from the balance sheet whether a supplier is about to fail

In brief: a balance sheet does not predict the future, but certain thresholds set by the Civil Code — eroded net equity, capital below the legal minimum — signal a situation already compromised, which often precedes an established insolvency by months or years. Reading them does not require training as a financial analyst: three numbers and an understanding of what they mean are enough.

The three thresholds to always check in a supplier's balance sheet

• Net equity eroded by more than 1/3 of share capital (art. 2446 c.c.): the law requires the company to act (capital reduction, recapitalisation) — in practice, it signals a solidity already weakened compared with the starting point.
• Capital fallen below the legal minimum for the company form (art. 2447 c.c.): a stricter threshold, often associated with a necessary and unavoidable recapitalisation, or a transformation of the company into a form with lower requirements.
• Negative net equity: the most critical of the three — liabilities exceed assets, and the company is operating in a condition that the law itself treats as a warning sign for going concern (art. 2086 c.c., paragraph 2, and art. 3 of the Business Crisis and Insolvency Code, Codice della Crisi d'Impresa e dell'Insolvenza, on the duty to detect a crisis early).

The date of the balance sheet matters as much as the number

A filed balance sheet is a snapshot at a specific date, not the current situation. The filing deadlines (art. 2435 c.c.) mean a balance sheet can already be 12-18 months old by the time you consult it: useful as a baseline, but to be read knowing how dated it is — especially for a supplier in a sector that has visibly been going through cyclical difficulties in the meantime.

Other signals to cross-check with the balance sheet, not the balance sheet alone

The balance sheet is one source, not the only one. Cross-checking it with recent protests and insolvency proceedings (which may be more up to date than the balance sheet itself), with payment behaviour towards other suppliers, and with any recent change of director builds a more reliable picture than a single accounting document, which by definition is already dated when you read it.

What a balance sheet does not tell you

It does not say whether the supplier will fail, or when — it says that, at a certain date, its financial position showed (or did not show) certain critical conditions that the law treats as relevant. Veryfy estimates these signals with risk management algorithms, not with a legal or accounting judgement: the decision on how to manage the relationship with that supplier — reducing dependence, asking for additional guarantees, or simply monitoring more closely — remains an assessment by the reader, not an automatic verdict that the data alone can give.