It’s one thing to predict the next Google, Facebook or Uber — the hot companies of the future that will define the next decade of enterprise and investing.
But what about predicting the next Borders or Blockbuster?
Sometimes big business flops can be just as spectacular as corporate success stories.
In the 1960s, New York University Professor Edward Altman set out to do just that. He devised a four-part formula — based entirely on publicly available financials — to predict which companies would go bankrupt within two years. The formula produced a single number for each company, called the Altman Z-Score. According to a 2000 study, the score successfully predicted bankruptcy between 80 and 90 percent of the time up through 1999.
FindTheCompany, a corporate research site from Graphiq, used Altman Z-Scores to do the same analysis for 2016 companies. In order to qualify for the list, companies had to have a market capitalization of at least $100 million. In the end, the team identified 30 large companies, including several household brands, at risk of bankruptcy in the near future. They can be seen in the table below.
Altman considered companies with an Altman Z-Score over 2.6 “safe,” companies with a score between 1.1 and 2.6 in a “gray” zone, and companies with a score under 1.1 “at risk.”
In brief, the formula considers the following factors:
- Working Capital / Total Assets: companies with a low or negative score here will struggle to pay bills on time
- Retained Earnings / Total Assets: companies that rely on large amounts of debt and borrowing receive a low or negative score here
- Earnings Before Interest & Taxes (EBIT) / Total Assets: companies that bring in a small amount of revenue relative to their size receive low or negative scores
- Book Value of Equity / Total Liabilities: a low or negative ratio here indicates that the company may be using debt to finance growth, which can often lead to bankruptcy