What’s the likelihood of the company going bankrupt?

What are advance singnals corporate solvency (possibility to bankruptcy)
What are advance singnals corporate solvency (possibility to bankruptcy)
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 Bankruptcy Altman Z-Score
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!

Millionaire by accident, an investment journey of a 40-year old non-native belgian

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!
casual investments made a huge 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.