With so much news-driven share price moves for the average stock these days, it is often easy to overlook the base financials of a company. To the uninitiated, a company’s financial report can be intimidating, and headlines about revenue or EBITDA can be the extent to which some investors look at the numbers. However one metric I like to use to gauge a company’s strength is known as the Altman Z-Score.
This calculation is effectively a credit-strength test that gives a listed company a number based on five key financial ratios. As a rule, anything above 3 is pretty solid, while anything below 1.8 is a riskier prospect. Of course, the number needs to be taken in context, and should always be viewed in relation to a sector or industry average.
Below I have calculated the Z-Score for Purplebricks (LSE: PURP), compared it to similar firms including Foxtons Group and Hunters Property, and the results were very telling. These numbers are based on the companies’ most recent full-year reports.
|
Ratio |
Purplebricks |
Industry Average |
|
Z-Score |
9.81 |
5.36 |
|
Working Capital/Total Assets |
0.83 |
0.32 |
|
Retained Earnings/Total Assets |
-0.17 |
0.22 |
|
EBIT/Total Assets |
-0.15 |
-0.06 |
|
Market Value of Equity/Total Liabilities |
15.01 |
6.92 |
|
Revenue/Total Assets |
0.54 |
0.72 |
Needless to say, these results are somewhat surprising – Purplebricks shows a healthy 9.81, even beating the industry average. Of course, there are some things we must take note of. Firstly, the financial report for Purplebricks was for the year ending April 2018 (its latest FY report at present), so these numbers are not necessarily reflective of its current position.
Also, when assessing the company against its peers, in some ways it is too unique for an accurate comparison. Traditional estate agents could arguably have a different business model that makes a like-for-like evaluation somewhat skewed. There are perhaps other firms that could be comparable in some ways, but for the purposes of an industry average, here we focus on estate agents specifically.
As you can see from the table, Purplebricks’ strong Z-Score comes in large part thanks to the market value of its equity. Even at current share prices, the large number of shares it has in issue is helping to firm up its numbers. Needless to say this is not necessarily the strongest of foundations to keep a company afloat.
What is interesting however, is that to a certain extent, our expectations of what we know the company is planning may in fact help this number. Pulling out of international markets is likely to reduce assets and liabilities, and the latest official guidance from the company said it expects total revenue of £130m to £140m for the year. With these figures, Purplebricks’ Z-Score is still likely to hold above the crucial 3 level.
Of course this number alone isn’t enough to make an investment decision. The rapid expansion into a global marketplace (which it will now have to scale back), a weakening property market and an increase in rival firms are all going to keep the ground shaky for it in the near future. But one thing this number does show us, is that perhaps the firm’s prospects are not quite as dire, for now, as we all may have thought.
