Here's why Imperial Brands' (LON:IMB) share price might be in serious trouble

Fast-moving consumer goods giant Imperial Brands (LON:IMB) appears to offer good value, with shares trading on a forecast PE ratio of 9.41 and paying out an 8.08% forecast yield - but are the cigarette maker's shares cheap for a reason?

If you look at the group's recent trading performance alone, you might think everything is fine. For the fiscal year ended 30 September 2018, Imperial Brands PLC revenues increased 1% to £30.52B and net income decreased 3% to £1.37B. Hardly cause for panic.

Looking a little deeper, however, important questions about the future of the company present themselves. There is a test - the Altman Z-Score - that was found to be 80-90% accurate in predicting bankruptcy one year before the event in the 31 years up until 1999.

What this score says about Food & Tobacco operator Imperial Brands (LON:IMB) might well be keeping the group’s chief financial officer, Oliver Tant, up at night...

Is time running out for Imperial Brands' share price?

The Altman Z-Score was developed by New York University finance professor and leading academic, Edward I. Altman. In 1968, the celebrated professor struck upon a combination of five weighted business ratios that is used by investment managers and hedge funds to this day.

Interpreting the Z-Score is simple. Any company with a Z-Score of less than 1.8 has been shown to have a significant risk of financial distress within two years. If we apply it to Imperial Brands (LON:IMB) what do we get? A Z-Score of 0.61 - well below the cut-off point that signals potential distress...

Specifically, this checklist draws our attention to the group's working assets as a proportion of total assets and the value of the group's equity compared to its liabilities, among other things. We can see that the group has a net gearing ratio of some 194.5%  - and that's before factoring in a pension deficit of £463m. In fact, even ignoring the pension fund, net debt at LON:IMB has increased more than 20% over the last five years.

You can see what the market as a whole has made of this increasing dependence on debt...

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