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 Consumer Cyclicals group WPP (LON:WPP).
What does the Altman Z-Score flag up about WPP (LON:WPP)?
Unfortunately, WPP fails Altman’s test, with a low Z-Score of 1.56. This is below the distress threshold of 1.8... WPP'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 Wpp than it is for most.
Here's exactly how Wpp fails the Z-Score:
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The problem areas for identified here can be explored in more depth on Stockopedia's research platform, which has been designed specifically with retail investors in mind. It's much better to investigate these issues now before it is too late. All the best investors have stringent due diligence processes that reduce the chances of them suffering big losses, so why not take a leaf out of their book?
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.