USA Today.com, just covered something called The Altman Z-Score ” a financial indicator that predicts when companies are careening toward serious financial distress, which the article says is commonly used by investment professionals.
“The Z-Score is a single number that summarizes the financial strength of companies in five dimensions. ”
“The Z-Score examines companies by sizing up working capital, retained earnings, earnings before interest and taxes to total assets and sales to total assets as well as market value to book value of liabilities.
“All that might sound complicated. But the bottom line is that the Z-Score gives investors a single number — almost like a letter grade — that tells how strong or shaky the company’s future is.”
“In an interview with USA TODAY, Z-Score inventor Edward Altman said that now investors need to be most concerned about companies with Z-Scores of less than zero”.
I have no idea of how Verisign can have a negative number since it has billion plus in cash and a over 50% profit margin, but it does top the list in the worst possible way.
USA Today published the six companies with the worst score in the Standard & Poor’s 1500 and low and behold the company with the lowest or worse score is VeriSign (VRSN),
“Z-Scores of less than 0, which implies that serious financial distress could be coming in the future”
Company Symbol Z-Score
VeriSign VRSN -9.01
Forest Oil FST -3.08
Ciena CIEN -1.66
Time TIME -1.32
Cincinnati Bell CBB -0.811
Harmonic HLIT -0.442
Sources: S&P Capital IQ, USA TODAY
The Z-Score was originally designed to measure the financial health of manufacturing companies. Altman has also created a related measure called the Double Z Prime, which is more appropriate for non-manufacturing firms.
This measure, too, reflects the difficult financial situation these companies are in. The Double Z Prime scores for the companies as of the second quarter of 2014 are listed below:
Company Symbol Double Z Prime Score
VeriSign VRSN -24.3
Forest Oil FST -6.28
Ciena CIEN -5.37
Time TIME 0.47*
Cincinnati Bell CBB -2.49
Harmonic HLIT -1.82
The USA Today Article goes on to say:
“VeriSign, through an e-mailed statement, says that its Z-Score, is distorted. “Verisign does not believe the Altman Z-Score, as calculated, reflects the Company’s financial health. The Altman Z-Score is intended to be used to predict potential future financial distress, but in the case of Verisign the result is significantly skewed by a transaction (the acquisition of Network Solutions in 2000) that occurred more than a decade ago which resulted in the large accumulated deficit balance on our balance sheet. The Company believes the use of its accumulated deficit balance in isolation, as it is in the Altman Z-Score calculation, does not result in an accurate assessment,” according to the company’s statement.
Its a very interesting article and you can check the whole article out here
