As a new subscriber I checked out my porfolio and was suprised to find Vodafone in the distress area of the Altman Z2 Score. I wonder if this score is relevant to a non manufacturing company.
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Vodafone Group Plc (Vodafone) is a mobile communications company operating across the globe providing a range of communications services. It offers a range of products and services, including voice, messaging, data and fixed-line solutions and devices to assist customers in meeting their total communications needs. It has a global presence, with equity interests in over 30 countries and over 40 partner markets worldwide. It operates in three geographic regions: Europe, Africa and Central Europe; Asia Pacific, and the Middle East, and has an investment in Verizon Wireless in the United States. In March 2012, Verizon Wireless, which is a joint venture of Verizon Communications Inc. and Vodafone, purchased the operating assets of Cellular One of Northeast Pennsylvania from the Company. In May 2013, Vodafone Group Plc announced launch of its carrier services business unit. more »
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Yes, it's quite surprising and we've been puzzling over it too. There are two Altman Z-scores, one (Z1) for manufacturing and another (Z2) for non-manufacturing. The score in question is Z2 so it does seem relevant. More background on Altman here: http://www.stockopedia.co.uk/content/the-altman-z-score-is-it-possible-to-predict-corporate-bankruptcy-using-a-formula-55725/
However, it's worth remembering that Altman, like any quant metric, does have false positives - In its initial test, the Altman Z-Score was found to be 72% accurate in predicting bankruptcy two years prior to the event. In subsequent tests over 31 years up until 1999, the model was found to be 80-90% accurate in predicting bankruptcy one year prior to the event.
So this might just be one of those cases where it's just non predictive, but frankly there's no way to know. By clicking on the Altman link popup, you will see more detail as to where and why it's failing, which may help take a view. The Piotroski score - which is effectively a kind of Financial Health Trend - does also give a very different picture.
Metrics such as Altman Z are undoubtedly useful, but as I keep banging on, it simply isn't good enough to solely look at the single figure. As Murakami says, you need to look at why VOD is failing and then make your own decision based on that.
Also, as Murakami points out, the S'pedia "drill down" feature is excellent - by clicking on the Zscore link, and onwards from there you can see exactly why a company is failing. In VOD's case, it's mainly because the company has substantial fixed assets, low working capital and high(ish) debt. Often this is a toxic mix but, in VOD's case I believe there are mitigating factors. To understand these, you do need to drill deeper and look at VOD's balance sheet and the notes thereto.
Firstly, it is easily understandable why VOD has this balance sheet structure: it is an infrastructure company with a large fixed asset base, hence working capital is relatively low. Potentially, this is dangerous because a stumble in cashflow could rapidly lead to trouble. However, one must also look at the other side of the balance sheet: debt - and equity. Putting it in numbers (to March 2011), tangible fixed asets (I always ignore intangibles, when considering bankruptcy risk) are £67.5bn; equity is £87.6bn; net current liabilities are £10bn and non-current liabilities are £36.6bn. Operating cashflow was £12bn. So it seems to me that there are several mitigating factors against the Z-score warning:
It therefore seems highly unlikely to me that the firm will be under financial pressure within the next two years.
I hold Vodafone. Lots.
Regards,
Mark
On this note I should also reinforce that the meters on the Stock Reports are 'global rules of thumb' rather than individually specific. As Murakami says, there are a minority of false positives and false negatives. Companies with high bankruptcy risk sometimes don't flag in the distress zone on the Altman meter, and sometimes companies that are very strong financially with no risk of default do.
On the other hand the Z-Score in general does seem to highlight companies that objectively seem to be in difficult trading environments. If you look at most retailers these days, they are all under pressure and using the screener you can find many household names with horrible Z-Scores. Debenhams, HMV, Dixons, Thorntons and lots of car vendors are on the list. As a fast forensic checkup its a great indicator to have around but like all statistical indicators you just have to understand its limitations!
Here's a link for subscribers to my 'retail trouble screen' http://www.stockopedia.co.uk/screens/retail-trouble-screen-598/