Even with a profit, a company can go bankrupt—"Inflation-driven bankruptcy" and "labor shortage bankruptcy" are not separate diseases

If asked why a company goes bankrupt, most people would answer like this.

"Because it's in the red."

I used to think so too. If the red ink continues, the company will go bankrupt. So, you just need to make it profitable. I thought it was a simple matter.

However, the numbers tell a different story.

When Tokyo Shoko Research investigated the finances of companies that went bankrupt in 2024, 66.2% of companies had a net loss in their latest financial results just before bankruptcy (Source: https://www.tsr-net.co.jp/data/detail/1201129_1527.html ).

Conversely, the remaining approximately one-third went bankrupt while still having a net profit.

That is one in three companies. It is by no means a rare occurrence.

And in the first half of 2026 (January to June), the content of this "going bankrupt even with a profit" appeared in a clearly visible form in the statistics. "Inflation-driven bankruptcy" and "labor shortage bankruptcy" both hit record highs.

Today, I will write about this. I will not talk about stock prices. I will not talk about listed companies. It is a story about what numbers to look at today so that your own company will still exist next year.

First, let's lay out the facts.

There are two companies that compile bankruptcy statistics for the first half of 2026. And the numbers are different. Let me clarify first. According to the
Teikoku Databank (TDB) compilation, corporate bankruptcies in the first half of 2026 were 5,335 cases. This is a +6.6% increase compared to the same period last year, and for the first half of the year, it is the fourth consecutive year of increase. Total liabilities were 724.736 billion yen (+6.9%). Of these, "inflation-driven bankruptcies" were 556 cases, which significantly updated the record high for a half-year basis. "Labor shortage bankruptcies" were 227 cases, which is also a record high for the first half of the year (Source: https://www.tdb.co.jp/report/bankruptcy/aggregation/20260708-bankruptcyh12026/ ).

On the other hand, according to the Tokyo Shoko Research (TSR) compilation, there were 5,346 cases. This is a +7.1% increase compared to the same period last year, and it is the fifth consecutive year of increase. Total liabilities were 734.082 billion yen (+6.3%). Inflation-driven bankruptcies were 439 cases, and labor shortage-related cases were 237 cases (+37.7%) (Source: https://www.tsr-net.co.jp/news/status/detail/1203029_1610.html ).

The number of bankruptcies itself is 5,335 and 5,346, which is almost the same. But inflation-driven bankruptcies are 556 and 439. That is a difference of over 100 cases.
It is not that one of them is lying. It is just that the definition of "what counts as a bankruptcy caused by inflation" is different. The reason for the consecutive increase being 4 or 5 years is the same. That is why I will stop picking just one and asserting "it was XX cases." I will keep it as a range. Inflation-driven bankruptcies are between 440 and 560 cases, and labor shortage bankruptcies are around 230 cases.

Regarding the level of the figures, reports vary in their expression. The original TSR announcement states, 'The number exceeding 5,000 in the first half is the first time since 2014, in 12 years.' On the other hand, some articles reported it as 'the highest level in 13 years.' I will write 'in 12 years' in accordance with the original announcement.

What is important is not the specific number of years. The fact that the number of bankruptcies in the first half has exceeded 5,000 for two consecutive years, and furthermore, the increase has not stopped is what matters.

And one more thing. Most of the companies going bankrupt are small.

• Capital less than 10 million yen: 3,875 cases (72.6% of the total) (TDB)

• Fewer than 10 employees: 90.6% composition ratio (TSR)

This is not a story about 10 large companies going under. It is a story about us.

Clearing up a misunderstanding: Companies do not go bankrupt because they are in the red

The moment a company stops is not the day the financial statements turn red. It is the day you cannot pay the money you are supposed to pay.

There is no money on payday. A promissory note does not clear. There is not enough in the account on the repayment date. At this moment, the company stops. It does not matter what the financial statements look like.

And profit and cash do not match surprisingly well. The culprits that create the gap are usually fixed.

1. Accounts receivable — Sold. Profit was recorded. Payment is in 2 months. We are fronting the cash for those 2 months

2. Inventory — Cash went out at the time of purchase. It does not become profit until it is sold. If the purchase price rises, the cash going out increases just by stocking the same amount

3. Repayment of loan principal — This is not an expense. It does not appear anywhere on the P&L. Even if profit is zero, the principal disappears from the account

4. Capital investment — The cash paid out becomes an expense over many years as depreciation. The cash goes out today

5. I believe the third one among these kills the most company presidents. It is the story I wrote about before in ' 500,000 profit is not enough for a 500,000 monthly repayment.' If you have a profit of 500,000 against a repayment of 500,000, you are short by the amount of taxes paid.

TSR's analysis provides figures to support this. For bankrupt companies, the ratio of interest payments to operating profit is 296.3%. This is an increase of 177.6 points from the 118.7% seen before the COVID-19 pandemic (Source: https://www.tsr-net.co.jp/data/detail/1201129_1527.html ).

They are paying three times the interest of the profit earned from operations. And that is just for interest. The principal is not included here. Regardless of whether their financial statements show a profit, a company in this state can no longer stop pedaling the bicycle.

The true nature of 'inflation-driven bankruptcy' is the inability to raise prices

Honestly, I don't think 'inflation-driven bankruptcy' is a very good name. A company will not go bankrupt just because prices have risen.

When procurement costs rise by 100 yen, if you can raise your selling price by 100 yen, your gross profit will not decrease. The only problem is a temporary mismatch in cash flow.

What causes bankruptcy is when procurement costs rise, but you cannot raise your selling price. In that case, the entire increase is deducted from your gross profit.

So, to what extent are Japanese companies passing on these costs? A survey by Teikoku Databank in February 2026 (with 10,416 valid responses) provides the answer.

• Price pass-on rate: 42.1% (up from 39.4% in the July 2025 survey)

• Companies that have passed on at least some costs: 76.9%

• Companies that cannot pass on any costs: 10.9%

(Source: https://www.tdb.co.jp/report/economic/20260319-pricepass-on202602/ )

A pass-on rate of 42.1% means that when costs rise by 100 yen, you have only been able to add 42 yen to the selling price. The company is absorbing the remaining 58 yen out of its own pocket.

As for where this 58 yen comes from, it comes from the gross profit. If gross profit decreases, there is less room to pay for labor, rent, and debt repayments. Inflation-driven bankruptcy is simply a story of gross profit being thinly shaved away until, one day, it drops below zero.

And the pass-on rate varies drastically by industry.

The top industries that are successfully passing on costs are Chemical wholesale 62.1% → Steel, non-ferrous, and mining product wholesale 57.7% → Machinery and equipment wholesale 53.2%.

The bottom industries that are not are Medical, welfare, and health services 14.7% → Inns and hotels 28.2% → Restaurants 32.8%.

Between the top and the bottom, there is a gap of more than four times.

This list may look like a list of industries, but it is actually a list of pricing power.

For wholesalers of chemicals and steel, if market prices for raw materials rise, saying "prices have gone up, so we are raising ours" is accepted. This is because the other party also knows that prices are rising. On the other hand, medical and welfare services have government-fixed prices, so they cannot decide their own prices in the first place. For inns and restaurants, if they raise prices, customers will silently go to the place next door.

Whether or not you can raise prices is not a matter of effort or negotiation skills, but a matter of whether you are in a position to decide your own prices.

Looking at the breakdown of TDB's 556 inflation-driven bankruptcies, the factors are as follows (with some overlap).

• Raw materials: 255 cases(+28.8%)

• Labor costs: 145 cases(+29.5%)

• Energy: 106 cases

• Packaging materials: 86 cases

(Source: https://www.tdb.co.jp/report/economic/20260707-inflationbankruptcy2606/ )

What I want you to pay attention to here is that "labor costs" are the second most common factor in inflation-driven bankruptcies.

We are talking about inflation, yet labor costs appear. This is the connection point that leads to the next topic.

The true nature of "labor shortage bankruptcy" is the inability to raise wages

227 labor shortage bankruptcies (TDB). The highest ever for the first half of the year. Let's look at the breakdown.

• Construction industry: 65 cases

• Service industry: 59 cases

• Transportation/Communications industry: 38 cases

• 176 cases were companies with fewer than 10 employees. Approximately 77.5% of the total

(Source: https://www.tdb.co.jp/report/bankruptcy/aggregation/20260708-bankruptcyh12026/ )

According to TSR's tally, there were 237 cases, an increase of 37.7%, of which **120 cases were caused by "soaring labor costs," an increase of 140.0% compared to the same period last year** (Source: https://www.tsr-net.co.jp/news/status/detail/1203029_1610.html ). That is 2.4 times higher.

The term 'labor shortage' sounds like there are no people available. But what is actually happening is usually different.

The amount that can be paid is not keeping up with market rates. That is all.

The minimum wage for fiscal year 2026, according to the guidelines of the Central Minimum Wages Council, has been recommended at a national weighted average of 1,176 yen, an increase of 55 yen or 4.9% from the previous year (Source: https://www.nikkei.com/article/DGXZQOUA2828Y0Y6A720C2000000/ ).

This is not just about 'only raising the wages of those at the minimum wage by 55 yen.' If you have people working for 1,200 yen an hour, you have to raise their wages too, or the numbers won't add up.It pushes everything up from the bottom.

And here is the cruel part—

The source of funds for wage increases can only come from gross profit.

As we saw in the previous chapter, gross profit is being eroded by high prices. For companies that have a cost-pass-through rate of 42.1%, meaning they are absorbing 58% of the costs themselves, there is no source of funds left for wage increases.

Therefore, even if you post job openings, no one comes. Because no one comes, the burden on existing employees increases. Veterans quit. When they quit, you have no choice but to turn down orders.Sales drop. Gross profit decreases even further.

And if gross profit decreases, you will be even less able to raise wages next year.

These two are two symptoms of the same disease.

Having written this far, this is what I most want to say.

'Inflation-driven bankruptcy' and 'Labor shortage bankruptcy' are not increasing separately.

• Purchasing costs rise → Cannot pass on to selling price → Gross profit becomes thin

• Gross profit is thin → No source of funds for wage increases → Cannot hire people / People quit

• No people → Turn down orders / Operations drop → Sales decrease

• Sales decrease → Negotiating power drops → Cannot pass on costs even more

• And then, gross profit becomes thin again.

We have come full circle. You are just going around in the same loop.

It is no coincidence that labor costs (145 cases) are included in the 'factors for inflation-driven bankruptcy' in TDB's classification, and rising labor costs (120 cases) are included in the 'causes of labor shortage bankruptcy' in TSR's classification.They are counting the same phenomenon by changing the entry point of the aggregation. That is why both reached record highs at the same time.

And there is only one thing at the center of this cycle.

It is the gross profit margin.

It is not sales. It is not profit either. The remainder after subtracting the cost of goods sold from sales determines whether this cycle turns or stops.

I previously wrote about expenses that should not be cut in "If you cut from the front lines, the company will become impoverished." That article was about "where to cut." Today's topic is what comes before that. To begin with, before cutting, is there any gross profit left?

So, how should it be—5 things you can check at your own company today

From here on, I will write about things you can do today, not tomorrow. Everything can be done with the trial balance and bankbook at hand. You don't need to ask your tax accountant.

1. List the trends in gross profit margin for 36 months
Not annually. It is for 3 years on a monthly basis. If it is annual, the deterioration will be smoothed out and become invisible.

Gross profit divided by sales. List these 36 figures and make a graph. It takes 10 minutes in Excel.

What you should look at is not the level, but the slope. If it is gradually declining, that is the early symptom of bankruptcy due to high prices. If it has dropped by 2 points in one year, it will have fallen by 10 points in five years. By that time, it will be too late.

2. With the recent price hikes, what percentage of the increased costs were you able to pass on?
The national average was 42.1%. Calculate your company's actual figures.

How much has the unit purchase price increased since last year? How much did you increase the unit sales price? Just do the division.

If it is lower than 42.1%, you are paying more out of your own pocket than the industry average. If it is higher, you have pricing power. This is a strength, so you should spend money on measures to protect it.

3. Calculate labor costs ÷ gross profit (labor share)
It is not the ratio of labor costs to sales. It is the ratio to gross profit. If you look at it as a sales ratio, you won't know what is happening when the gross profit margin changes.

If gross profit is decreasing but labor costs remain the same, this ratio will automatically rise. Once it rises to the limit, you can no longer raise wages. That is the threshold where your company joins the side of bankruptcy due to labor shortages.

4. How many months of cash do you have on hand—calculate by adding principal repayments
A common calculation is "cash ÷ monthly fixed costs." This is not enough.

Include monthly loan principal repayments in the denominator. Principal does not appear on the P&L, but it definitely disappears from the account. A president who thinks "I have 3 months' worth" without including this actually only has 2 months' worth.

With that in mind, think about this: If sales became zero starting tomorrow, how many months would you last?

The appropriate level differs by industry, so I will not write that "X months is safe." I cannot write that. However, the state of managing a company without knowing your own company's numbers is dangerous regardless of the industry.

5. What percentage of your sales can you set the price for yourself?
Divide sales into two categories for each customer and each product.

• Sales for which we determine the price

• Sales where the price is determined by the other party(official prices, prime contractor-set prices, market-linked prices, bidding)

The higher the ratio of the latter, the more vulnerable your company is to rising prices. The industry-by-industry ranking of pass-through rates was, in the end, a ranking of this ratio.

Lower this ratio. This is the only fundamental solution to the issue discussed today. It is not a technique for price negotiation.It is about changing the structure. It takes time. That is why you need to start today.

For the sake of fairness, I will also present the other side.

Up to this point, I have written as if an increase in bankruptcies is a bad thing. However, that is because I am writing from the perspective of 'not wanting to be on the side that goes under'.

There is certainly another way to look at it.

From the perspective of those who survive, elimination also means fewer competitors.

If five companies were in a war of attrition in the same trade area and two exited, the remaining three would see an increase in orders and price hikes would be easier to push through.The rise in the pass-through rate is also because there are fewer competitors. The fact that the figure of 42.1% rose by 2.7 points from the previous survey probably includes that component.

And, to say something even colder.

It is not necessarily the case that every company should survive.

Suppose there is a business that remains low in productivity, cannot raise wages, and only survives by using employees cheaply. If that company exits, the people who were there will move to a company that can pay higher wages.For that person's life, that might be better. Looking at Japan as a whole, labor will shift toward higher productivity.

The zero-zero interest loans that appeared in large numbers during the COVID period stopped the clocks of companies that should have stopped. According to TDB's aggregation,bankruptcies after zero-zero loans were 256 in the first half, a decrease for the second consecutive year (Source: https://www.tdb.co.jp/report/bankruptcy/aggregation/20260708-bankruptcyh12026/ ). That wave is beginning to pass its peak. What is happening now is, a normal elimination after the stopped clock has started moving again—that aspect is certainly present.

I wrote that over 5,000 cases in the first half is the first time in 12 years. In other words,around 2014, this was normal. One could also read it as returning from a period that was abnormally low, rather than returning to an abnormal value.

That is why I will not write that 'the government should help because bankruptcies have increased'.The moment I write that, companies stop looking at their own gross profit margins.

However, I want to say one thing.Whether you end up on the side being eliminated is not determined solely by the efforts of the management. The 14.7% pass-through rate in medical and welfare services is not because the presidents of those industries are lazy.It is because it is decided by the system. I will not say 'if you work hard you can survive' nor 'it is your own responsibility if you go under'.

Summary: 3 things to take away today

1. A company goes bankrupt not because it is in the red, but because it runs out of cash.
One-third of bankrupt companies (the remainder of the 66.2% with a final deficit) go bankrupt while still in the black. Look at the bank balance and the principal repayment schedule, not the color of the financial statements.

2. 'Inflation-driven bankruptcy' and 'labor shortage bankruptcy' are connected at the same point: gross profit.
Cannot pass on costs -> gross profit is thin -> cannot raise wages -> people leave -> sales decrease -> cannot pass on costs further. The center of the wheel is the gross profit margin, not price negotiation or recruitment media.

3. There are 5 numbers you should look at. All of them can be found in your trial balance.
1) 36-month trend of gross profit margin 2) Your company's price pass-through rate (national average 42.1%) 3) Personnel expenses / gross profit 4) Number of months of cash including principal repayment 5) Ratio of sales where you can decide the price yourself.

Many presidents leave their company's numbers to others. I was like that for a long time too. As I wrote in 'A president who cannot read accounting will eventually fall into a trap,' there are jobs you can delegate and jobs you must not.

The trend of your gross profit margin is on the side you should not be on. A tax accountant will prepare your financial statements, but they won't tell you, "Your gross profit margin has dropped by 3 points in three years," unless you ask. To ask, it is a prerequisite that you are looking at those numbers yourself.

Both the 556 cases of inflation-driven bankruptcy and the 227 cases of labor shortage bankruptcy are stories that are already over by the time they become statistics. Before you end up there, there is a way to know which side your company is on. The five points written above are exactly that.

How to use the results of your calculations—whether to raise prices, reduce staff, narrow down your business, refinance, or close up shop while things are still clean.

The decision is yours.

▼Recommended Reading

• "500,000 yen in profit is not enough for a 500,000 yen monthly repayment"—What should you use to judge borrowing?

• Cutting from the front lines leads to a slow decline—The mistake of cutting "costs tied to sales" first

• What is Dam-Style Management?—If you have to ask "how to do it," you probably can't

※This article is an explanation of general concepts and is not intended as individual management, labor, or investment advice. Numerical values are based on public materials from each company confirmed as of August 8, 2026. Since the definition of bankruptcy cases varies by research agency, the agency names are provided alongside the figures.