The Aztech deal: Was it possible to avoid such a situation?

Imagine we are now in June 2016 and we are looking for some stocks that are cheap based on its book value. Based on its earning report, Aztech had just release its quarterly report and its declared book value of about 99 cents. The share price was 45 cents at that point of time. This represent a good discount of 50%.

Fast forward a few months, the share price has dropped to 30 odd cents, but you refuse to average down... perhaps you want to diversify into other companies. But one day, the offer of 42 cents came in to privatize the company. No matter what happens, you stand to lose at least 3 cents a share.

Due to luck (and lack of capital) I did not invest in Aztech. But this deal could be a valuable learning session for me.

I did a quick and dirty look at its dividend payouts. Take note that the free cash flow component might be wrong.

Right off the bat, there were years that the company was indeed doing poorly but the management opt to pay out dividends. These years are 2008-2011. There were profitable years which I felt they could have paid a dividend, but chose not to. These are 2005 and 2015.

So with the dividend history giving you a mixed result... Are there  any warning signs out there?

Personally I can only come up with a few... but they are hit and miss

1) A history of poor Returns on Assets, Stagnant Current Ratios and Deteriorating Equity
If the ROA and ROE is negative, your book value naturally declines. Hence a bet on its reversion to book value is probably a little dangerous. What about those deep value companies? I guess it takes a different kind of person to be a distressed-asset investor...

The left most field is 2011, and the 2 right most fields refer to the 5 years and 1 year trend.
The 5 year trend average to a net negative... I guess you might be able to blame management for that...

The shareholder's equity has been plunging for the last 3 years, naturally from its negative ROE.


2) Diversification into vastly different fields
Aztech is primarily an electronic company, but have diversify into many different kinds of business.

 I think it might be difficult to see how they can achieve any kind of synergy nor economy of scale, and neither will it be easy to find someone who knows how to manage so many different industries...

3) Moderate to high debt
Most businesses are selling at a low P/B ratio due to bad earnings. It is no surprise that the company is probably facing headwinds, be it as a company or as a sector.  As such, a increasing debt means that the company is not given the luxury of time to recover.

Aztech's Interest Cover in its last profitable year of 2014, is only about 3.5. It's most profitable year, 2006, have a interest cover of about 10.

We are currently in a low-interest-rate environment. Companies and individuals who depended on leverage will definitely be in an unpleasant situation when the tide turns.

----
I guess I am extremely disturbed by this episode. Even though I am not vested, sooner or later, I might be caught up in this sticky situation.

What lessons can I learn from here?

1. Diversify so that blow ups like this will not hurt me too badly.
2. Invest in old companies with a consistent record in ROA. Aztech's ROA is a bit of a see-saw to be honest...
3. Low debt. Debt kills. Period.