Yahoo Finance Is Vodafone's weak balance sheet cause for concern?
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 Vodafone (LON:VOD), for example.
How does Vodafone fare against Altman’s influential checklist?
GET MORE DATA-DRIVEN INSIGHTS INTO LON:VOD »
What does the Altman Z-Score flag up about Vodafone?
Unfortunately, Vodafone fails Altman’s test, with a worryingly low Z-Score of -2.09...
Vodafone'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 Vodafone than it is for most.
In 2009, Morgan Stanley strategy analyst, Graham Secker, used the Z-score to rank a basket of European companies. He found that the companies with weaker balance sheets underperformed the market more than two-thirds of the time. This quick look at Vodafone shows that it also has weak spots that require further investigation.
To see which risks our algorithms specifically flags, please view Vodafone's StockReport here with a free trial.
Fortify your portfolio with simple, effective tools
The problem areas for Vodafone 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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