With so much news-driven share price movement 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 Kier Group (LSE: KIE), compared it to other builders including Barratt Developments (LON:BDEV) and Taylor Wimpey (LON:TW), and the numbers leave a lot to be desired. These numbers are based on the companies’ 2018 full-year reports.
| Ratio | Kier Group | Industry Average |
| Z-Score | 1.77 | 3.31 |
| Working Capital/Total Assets | -0.01 | 0.44 |
| Retained Earnings/Total Assets | 0.01 | 0.29 |
| EBIT/Total Assets | 0.04 | 0.1 |
| Market Value of Equity/Total Liabilities | 0.05 | 1.66 |
| Revenue/Total Assets | 1.61 | 1.03 |
It is fair to say that a good portion of this is due to the latest share price declines, which in turn have hit the total market value of its equity. However I also calculated the previous year’s Z-Score (before the shares got hammered) and the number only came in at 1.85 – hardly a massive vote of confidence. When I added the £40m ‘accountancy error’ to the latest figures, it edged the Z-Score down to 1.75.
Going forward, things could get worse.
The company admits that while its intended restructuring will save it about £55m a year from 2021, it will cost it £56m over the next two years to implement. To put it simply, it is going to suffer the costs at a time when when it cannot afford them, and only gain the benefit at a time when it may not even exist!
With the company’s increasing debt levels (and what was a failure to accurately communicate them to the market), many have compared Kier to the failed contractor Carillion. Looking at these numbers, I think that it is starting to look like a very real possibility that it will go the same way.
Karl has no positions in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019