Plans by Japanese electronics conglomerate Sharp to shrink its capital base will only buy the company time, but its long-term survival remains in doubt, analysts told CNBC.
"It's a desperate attempt to pre-empt insolvency," said BNP Paribas chief credit analyst Mana Nakazoran by phone. The reported measures "will buy the company some time, but I can't say if Sharp will still exist in five years' time."
The Osaka-based maker of LCD displays, which has accumulated losses of nearly 920 billion yen ($7.68 billion) over the past three years on poor sales and stiff competition, has also accumulated a massive debt burden on the way.
The company is reportedly facing a loss of around 200 billion yen the fiscal year that ended March 2015 as a result of restructuring. Its debt meanwhile stood at nearly 2 trillion yen, according its annual report in the previous year.
The company and its creditor banks now appear to have resorted to a radical solution: shrink the balance sheet by hacking the firm's capital base by 99.99 percent, from over 120 billion yen to 100 million, according to Japanese media reports, or levels usually associated with small and medium sized businesses.
The move is believed to allow the company to avoid insolvency and rebuild its capital base from scratch.
Sharp conceded in a statement on Monday morning that it is "considering various possibilities concerning our capital policy including the issuance of preferred shares and the decrease in capital, but no specific decisions are made at this time."
Sharp's share price tanked 27 percent at one point on Monday morning trade.
"It's a short term solution, but it's difficult to foresee Sharp's future beyond three years," Daiwa credit analyst Takao Matsuzaka told CNBC by phone.
Banks on the hook
At least the banks appear committed to keeping Sharp in business, analysts said. In a small consolation for shareholders, the banks will reportedly agree to swap its debt for preference shares.
"A preference share issue is preferable to bankruptcy or a new ordinary share issue, which would either wipe out or severely dilute existing stocks," said Daiwa's Matsuzawa.
Restructuring the balance sheet will not, however, solve Sharp's fundamental problem: not having a profitable core business, analysts said. The main liquid crystal display (LCD) panel manufacturing operations remains under pressure from severe price competition from Japanese and Chinese rivals.
"Sharp needs to build a viable strategy by first finding a profitable business, and then pull out of the all the other unprofitable ones," BNP Paribas' Mana Nakazora said.
The company is scheduled to unveil its restructuring plan this Thursday, after the market close.