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Is Rolls-Royce Holdings's weak balance sheet cause for concern?

Michael Green

Business distress and bankruptcy can put a dent in your portfolio no matter how well diversified you are.

That's why paying attention to simple checklists that flag up risky stocks is so important. Stockopedia provides many of these screening tools to help investors safely navigate the stock markets. One of them - 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

That's quite the vote of confidence. The Z-Score was developed by New York University finance professor and leading academic, Edward I. Altman. It 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 large cap Rolls-Royce Holdings (LON:RR.), for example.

How does Rolls-Royce Holdings fare against Altman’s influential checklist?

GET MORE DATA-DRIVEN INSIGHTS INTO LON:RR. »

What does the Altman Z-Score flag up about Rolls-Royce Holdings?

Unfortunately, Rolls-Royce Holdings fails Altman’s test, with a worryingly low Z-Score of -0.15...

Rolls-Royce Holdings's low Z-Score doesn't mean that it is definitely heading for financial distress, but it does mean this fate is more of a risk for Rolls-Royce Holdings than it is for most.

To view more information about Rolls-Royce's Z-Score, please view its StockReport with a free trial on us.


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The problem areas for Rolls-royce Holdings identified here can be explored in more depth on Stockopedia's research platform. All the best investors have stringent due diligence processes that reduce the chances of them suffering big losses, so why not take a leaf out of their book?

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