LWN - Comments
<<They are in the process of trying to sell assets. If they are successful in doing that, then the numerators will go up and the denominator will go down, so that the Z score will go way up.
Isn't that what would normally happen in a turnaround?>>
Absolutely. The Total Assets (TA) figure is the denominator in 4 out of the 5 financial ratios, so anything that can be done to shrink total assets will directly increase the Z-score and, likewise, the financial health of the company.
<<The shareholders equity, which is computed using the book value of the assets, is a very substantial number, suggesting that shareholders would fetch $17 a share in a liquidation. Unless of course the assets aren't worth what the co. says they are worth.>>
When I perform a liquidation analysis, I usually create four columns on a spreadsheet in the following order, read from left to right: (1) book value, (2) going concern value, (3) orderly liquidation value, and (4) forced liquidation value. Often the numbers for each column deteriorate across the board as you move to the right on the spreadsheet. What I don't know is exactly how distressed the company is, and how much time they have to shed the assets. If they can do it in an orderly fashion, they may get twice the value they would if done in a forced liquidation, but they will almost always get less than they would as a going concern.
Book value is not really relevant other than as a benchmark representing the original cost of acquiring the assets.
<<Anyway, the co. might go bankrupt if they can't sell assets fast enough, but even if they do go BK, the assets are there.>>
Agreed. The real question is whether or not there will be anything left over for the shareholders, who are at the bottom of the food chain in a bankruptcy. Usually proceeds are distributed in the following (albeit rather simplistic) order: professionals fees and administrative claims, secured creditors, unsecured creditors, and equity holders.
Limited financial recovery (or total non-recovery) are the primary risks that equity investors face when investing in distressed companies that eventually end up in bankruptcy.
JMHO, of course.
Razor |
