What’s the likelihood of the company going bankrupt?

Statistical check Of Corporate Solvency (Altman Z-score)

After suffering the heavy losses in few of my earlier stocks in Chinese companies, I was away from the stock market. Few weeks were very painful to  overcome the fear of investment. Though, the reason of the stocks got bankrupt, were simple. Both the companies – China Agritech (CAGC) & Wonder Auto (WATG) was a fraud and de-listed from the New York Stock Exchange (NYSE).

So, What’s the Likelihood of company going bankrupt?

Here comes the Altman Z-score to gauge the possibility of solvency a corporate (credit-strength test) for publicly traded manufacturing company.

What is the ‘Altman Z-Score’?

Altman Z-score is based on 5 financial ratios that are calculated from the company balance sheet found in quarterly statements.


Risk Of Solvency

For manufacturing sector z-score= 1.2A + 1.4B + 3.3C + 0.6D + 1E

For non-manufacturing sector z-score= 6.56A + 3.26B + 6.72C + 1.05D

Where A, B, C, D and E are following parameters:


A= Working Capital / Total Assets [Liquid assets measurement]

 

B = Retained Earnings / Total Assets [Profitability Measurement]

 

C = Earnings Before Interest and Taxes / Total Assets [Operating efficiency Measurement]

 

D = Market Value of Equity / Book Value of Total Liabilities [Valuation measurement]

 

E= Sales/ Total Assets. [Asset turnover measurement]


 

My Notes on Altman Z-Score check

  • Altman z-score is a likelihood and not a prediction. The score measures the probability of default due to the financial distress based on the current financial statistics of the company.
  • I invest strategically for the long-term. Though, I have many example where this proved incorrect. So, I consider this an important information.
  • This is not full-proof test. It’s rather for statistical satisfaction. I do due diligence on 7-checks of highly effective investors. Stay tuned for next posts.

 

At what frequency need to calculate Altman Z-Score?

Since the price of the stock changes in market, I calculate it before buying. (actually, on many website, it is readily available). I check sites like morningstar, marketwatch, or simply Google. Easy isn’t it?

These 2 transactions made me millionaire!

As I shared in previous post, my first buck in Wall Street stocks was like a gamble. It was putting all my hard-earned money into the stock market – without any experience or knowledge about the business. It was making of a millionaire by accident!

 

Bought apple shares instead of an iPod – in 2003

 

Apple advertisements were very appealing (and still are.)  Whether, it was Mac or iPod I wanted to own. I wanted to grab an iPod as it was so fancy for me.

On a bright summer day in Brussels, I went to the Media Markt to buy my dream – an iPod. I was impatient to start using waiting at the cash counter to pay. But, at the very last moment, I changed my mind after looking the tagline of the Apple advertisement – “Think Differently”. Following the new thought, I left the shop without purchase and  reached to the broker to buy shares of Apple Inc. (AAPL) worth 450$. I got 24 shares at the price of 19$ per share, plus broker commission.

It was a good long-term investment!

Including 2 stock splits of 7:1 and 2:1 and many quarterly dividends, It is over 40,000 € profit!
( I had no idea or insight of the stock market when I put all saving in AKS shares! )

My second investment in an unknown steel company resulted a huge profit of 843,000 $ !

 

I did not have to wait for my next investment. (Though, I knew nothing about investments, and it was not a planned purchase).

Since 1995, I started the job after graduation. My savings were 50 € each month after all the expenses and paying the bills. After 2-3 years, I started saving a bit more. Later, I changed some jobs and pay hikes.

Even then, my saving account had in total +/- 50,000 € (in year 2003).

In an evening, I was having a casual talks with my friend. I use to see people having profits and considered myself a novice when it comes to wealth creation ideas. This guy mentioned about steel company – AK Steel (AKS). Following my instincts, I put all my savings of many years in buying shares of the company. The stock was in penny cheap stock price 2.40 $/ share. I bought shares worth 48,000 $.

I was actually fortunate – this company turned around and it’s share was trading at 44.55 $ when I sold in November 2007.

This sell  transaction was worth 891,000 $,  Profit of 843,000 $ !

 

Millionaire by accident:

 Between 2003 and 2007 Few more short-term trades made me a millionaire by accident.

As you can imagine, I was on top of the world after making huge profit.

In 2005, I bought my first real estate apartment in Central Brussels at 90,000 € (Of course, with mortgage)

 

… I will continue my timeline investment  in my next post. Stay tunes and post your comments.