Screening out weak balance sheets is one of the most effective ways of reducing risk in your portfolio.
One simple way to do this is to apply Stockopedia's take on the Altman Z-Score, a checklist that was found to be up to 80-90% accurate in predicting bankruptcy one year before the event in the 31 years up until 1999 in the original study. We can see it in action by applying it to Telecoms group Vodafone (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 -1.79. This is well below the distress threshold of 1.8... 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. The group's rolling 8.81% dividend yield also suggests the market thinks it might have to reduce its payments to shareholders due to balance sheet pressures.
Disclaimer: These articles are provided for information purposes only. The content is not intended to be a personal recommendation. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser. The author has no position in the stocks mentioned, unless otherwise stated.