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Credit analysis identifies 11 potential weak companies

leave a comment » has recently provided a comprehensive credit analysis on companies listed on the Copenhagen Stock Exchange for its partner Økonomisk Ugebrev. The analysis shows that 11 companies have high risk of bankruptcy within the next two years.

The credit analysis is built on the principles on credit analysis put forward by professor Altman. His famous formula Altman Z-score gives companies a credit rating based on its historical accounting data. The formula includes total accumulated earnings, current operating earnings, capital structure and asset utilisation. The rating implies the probability of bankruptcy with the next two years. Values above 8,15 corresponds to an AAA-ratingfromS&P and values between 5,65-8,15 corresponds to investment grade ratings. Values between 1,75-5,65 indicates highly speculative investments due to high credit risk. Values below 1,75 indicates extremely high risk of bankruptcy in the near future unless the company becomes cash flow positive or restructure its balance sheet.

The conclusion in the analysis was mentioned in the media. brought the story with pictures of the 11 weak companies. RB-Børsen made a more thorough extract from the analysis. We provided the same analysis last year and one of the weakest companies (Mondo) from last year has filled for bankruptcy. The list with weak companies is dominated by real estate and sport entertainment (football clubs and associated activities). On the list, Parken Sport & Entertainment (the company behind Denmark’s largest football club) has been in huge trouble and was forced to issue additionally common stock to pay down debt.

We recommend you as an individual investor to always check the Z-score on the stocks you own or the ones you consider to invest in. You can easily find the Z-score (credit score) under the ratios menu.

As you can see BP’s (British Petroleum) Z-score is 7.05 which indicates a high credit rating and low investment risk in terms of BP’s overall credit risk.

If we look at some well-known companies from the leading UK index FTSE 100 you would be surprised to see which one that are potentially weak.

FTSE 100 companies with low Z-score:

  • Thomas Cook Group (2,24)
  • Vodafone Group (2,32) – primarily due to their very poor performance in terms of earnings and operating earnings in 2006 and 2007. The past performance is incorporated into the Z-score.
  • British Airways (2,43)

Do yourself a favour and check the Z-score on your stocks and build a strong portfolio consisting of companies with high credit ratings.


Written by Peter Garnry

21. April 2010 at 09:25

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