Paying attention to a few simple checklists can radically improve our risk management. One of these - the Altman Z-Score - was found to be:
- 72% accurate in predicting bankruptcy two years prior to the event in its initial test
- 80-90% accurate in predicting bankruptcy one year before the event in the 31 years up until 1999
The Z-Score measures how closely a firm resembles other firms that have filed for bankruptcy by considering the following areas:
- Current assets as a proportion of total assets,
- Cumulative profitability and use of leverage,
- Productivity of assets, and
- Firm value compared to liabilities
A Z-Score of more than 2.99 is considered to be a safe company. Those with a Z-Score of less than 1.8, on the other hand, have been shown to have a significant risk of financial distress within two years. We can see the checklist in action by applying it to a listed company. Take Ds Smith (LON:SMDS), for example.
How does Ds Smith fare against Altman’s influential checklist?
What does the Altman Z-Score flag up about Ds Smith?
Ds Smith gets a Z-Score of 1.16, indicating that caution should be taken when considering this stock. To find out more information, please review Ds Smith's StockReport with a free trial on us.
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