5 Companies That Are Distressing Investors
The Altman-Z Score was developed by Edward Altman to help identify companies that may fall into bankruptcy. The quantitative scoring system combines five financial ratios using a company's balance sheet to categorize companies into several bankruptcy-probability buckets.
The five metrics of the Altman Z Score include working capital/total assets, retained earnings/total assets, EBIT/total assets, market value of equity/book value of total liabilities and sales/assets.
A company with an Altman Z score of less than 1.81 is considered to be in a "distress zone" and, therefore, according to Altman, is at a higher risk for bankruptcy versus its competitors.
Altman also developed a metric called the Double Prime Z Score specifically for non-manufacturing firms, a slight variation on the aforementioned model. It identifies distress levels as companies with a score less than 1.1.
TheStreet Ratings analyzed the Altman Z Scores of all U.S.-traded stocks and searched for notable companies with scores below the distress level.
What follows are five companies that, according to Edward Altman's gauge, have a higher probability of bankruptcy. Note that we have used the second variation seeking non-manufacturing firms with a Double Prime Z Score less than 1.1.
TheStreet Ratings Recommendation: SELL
Altman Z Score: -8.74
Overstock, a struggling online retailer, has long been a target of short sellers. As of last check, nearly 22% of the company's float was held short. Those short sellers have likely identified the concerns that we see regarding the solvency of the company. Here's a snippet from our report:
"The company has grown sales and net income during the past quarter when compared with the same quarter a year ago. However, it was unable to keep up with the growth of the average competitor within its industry.
Overstock has weak liquidity. Currently, the quick ratio is 0.61, which shows a lack of ability to cover short-term cash needs. The company's liquidity has decreased from the same period last year.