Altman's Bankruptcy Predictor Analysis of Abacan
<<With so many other positive developments in the area, as pointed out by Ed's post, it's getting harder and harder to keep wearing those damned blinders and having hope for Abacan.>>
Steve:
There is a specific mathematical formula called the Altman Bankruptcy Predictor that is used in the turnaround industry to assess and predict a company's short-term survival prospects. The formula is named after the renowned Edward I. Altman, the Max L. Heine Professor of Finance at New York University's Stern School of Business, who published the initial research back in 1968.
stern.nyu.edu
Altman's Bankruptcy Predictor (or Z-score) is calculated as follows:
Z = (1.2*X1)+(1.4*X2)+(3.3*X3)+(0.6*X4)+(1.0*X5)
where:
X1 = Working Capital / Total Assets = WC/TA
X2 = Retained Earnings / Total Assets = RE/TA
X3 = EBIT / Total Assets = EBIT/TA
X4 = Market Value of Equity / Book Value of Liabilities = MVE/BVTL
X5 = Total Sales / Total Assets = TS/TA
The Altman Z-score is used to determine a company's short-term outlook or future viability, where:
> 3.0 ... Strong
1.8 - 3.0 ... In danger
< 1.8 ... Near death
FWIW, I calculated Abacan's Z-score as follows for FYE 1998 (12/31/98). All data was obtained from the company's 1998 Annual Report via the SEDAR website...
sedar.com
The results of the calculation are not really surprising, but nevertheless illustrative of the company's current status...
X1 = WC/TA = (3.336-45.738)/95.809 = -0.443 < 0 (assume zero, just to be fair)
X2 = RE/TA = -226.679/95.809 = -2.366 (ditto above)
X3 = EBIT/TA = (-16.875-0.181+3.022)/95.809 = -0.146 (ditto above)
X4 = MVE/BVTD = (114.371*0.3438)/45.738 = 0.860
X5 = TS/TA = 12.445/95.809 = 0.130
Z = (1.2*0.0)+(1.4*0.0)+(3.3*0.0)+(0.6*0.860)+(1.0*0.130)
-or-
Z = 0.646
The above number is well below the "near death" threshold (1.8), obviously not a good sign for Abacan shareholders.
The recent trend is the most important indicator of future success or failure because companies' fortunes never turn on a dime.
It would be rather interesting to look at the trend over the last few years to see where the company crossed over into the crisis zone. I would suspect it was back in 1997.
According to one scholarly journal, Altman's Bankruptcy Predictor has proven consistently accurate over the period of time since its development. The original samples in Altman's research displayed accuracy of 95 percent based on data from approximately one year prior to failure. The accuracy dropped to 72 percent based on two-year data. Subsequent tests on firms that have gone bankrupt since 1968 have shown an accuracy level of 82 to 85 percent.
Altman's model is used for a number of different purposes throughout various industries, and not just the turnaround industry; i.e.:
- Credit analysis for accept/reject decisions,
- Investment analyses for money managers and investment bankers,
- Auditors' analyses for going concern assessments,
- Legal analysis for prudent man and failing company doctrine defenses, and
- Merger target analyses both before and during reorganizations.
What the formula doesn't tell you is what to do with the results. That you have to determine for yourself.
All of the above is, of course, my opinion only.
Best of luck to all.
Razor |
