Hammerson (LON:HMSO): are you aware of these financial risks?

Legendary stock trader Paul Tudor Jones once said: “At the end of the day, the most important thing is how good are you at risk control."

Luckily it is not as hard as you might think to upgrade your risk management systems. Simple checklists can make for surprisingly effective screens. For example, one of the most famous balance sheet checklists was found to be:

• 72% accurate in predicting bankruptcy two years prior to the event in its initial test, and
• 80-90% accurate in predicting bankruptcy one year before the event in the 31 years up until 1999

These results are for the Altman Z-Score, which measures the degree to which a stock resembles companies that have gone out of business in the past. Steering clear of this type of stock could save us a lot of pain in the long run. 

This Z-Score raises a couple of concerns for shopping centre landlord Hammerson (LON:HMSO), which scores a 1.39 - below the cut-off point that signals potential distress. Here is a snapshot of where exactly the company fails:

Using the Z-Score to protect your portfolio

The Z-Score has proven very effective in predicting business distress. It measures how closely a firm resembles other firms that have filed for bankruptcy by looking for red flags in the following areas:

• Current assets as a proportion of total assets,
• Cumulative profitability and use of leverage,
• Productivity of assets, and
• Firm value compared to liabilities

Steering clear of stocks that fail these checks means you are avoiding companies that exhibit similar financial characteristics to companies that have gone bankrupt in the past, often as a result of having a weak balance sheet.

Next Steps

To find more stocks like Hammerson, you'll need to equip yourself with professional-grade data and screening tools to pinpoint the highest quality companies in the market. This kind of information has traditionally been closely guarded by professional fund managers. But our team of financial analysts have carefully constructed this screen - which gives you everything you need.

In less than a minute, you can be exploring a list of stocks with the very strongest financial ratios in the market. You'll be joining us on a journey towards owning the very best quality stocks possible. So what are you waiting for? Come and get started for free.