A company declaring bankruptcy is a nightmare scenario for many investors. But unfortunately, it does happen.
However, even for the most experienced analysts, it’s almost impossible to try and pinpoint the companies that are at the most risk of going out of business.
So, to try and simplify things, Professor Edward I. Altman developed the Altman Z-Score.
The Z-Score Simply put, the Z-Score is an indicator generated from a set of balance sheet ratios. If the Z-Score is greater than 3, the financial health of the company is good. Anything less than 1.8 indicates financial distress. Tests have shown that between 80% and 90% of the time, companies scoring less than 1.8 go out of business.
There are four key tests used to compute the Z-Score. Firstly, the company must have plenty of cash on hand to meet upcoming liabilities. Secondly, the majority of the company’s assets must have been acquired with retained profit, to prove that the business is capable of growing without outside help.
Thirdly, the company must demonstrate a high level of earnings compared to assets. This is once again to show that the business is capable of growing without outside help. And lastly, the company in questions debt must not exceed a certain percentage of its market value.
The lowest scores Premier Foods (LSE: PFD) has one of the lowest Z-Scores around, weighing in with a score of -0.4. The company has a negative working capital balance, or in other words it does not have enough cash on hand to pay its liabilities falling due within 12 months. Moreover, the company has a net debt pile of £571m, £220m more than the group’s current market capitalisation.
This is my first ever post! I have been in and out of this share for several years now and have have an average of about 50p having been well up at one stage. This article was released last week and I would like any opinions on it as it has scared me! [Link Removed]
Agree. But unless we have bad news the SP should rise considerably on announcement. To this effect some players cannot afford to wait till may and in the event of inline trading then pay a lot more. I still feel we may see the SP trickle over 50p prior to the results. Indeed, if the past is anything to go by, news leaks out prior to results.
No further news expected for another 11 weeks (19 may). short term traders selling up to buy back closer to the results. big sellers and buyers gone, a big buyer can only buy if big sellers around. Market makers trying to create volumes by triggering stop losses, still believe most of the automated trades are algorithmic to move share price one way or another. Bad trading statements from a few food manufacturers i.e. thorntons, devro. Can see this just drifting for the short term.
do you sell everytime they rise? if so sooner or later when you sell, you may find you cannot buy back below the price at what you sold. It is completely plausible that those whom sell at 43p maty not be able to buy again at 44p!!!
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