Here's why the Stagecoach share price might be in trouble

Paying attention to a few simple checklists can radically improve our risk management. One of these - the Altman Z-Score - was found to be:

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

The Z-Score measures how closely a firm resembles other firms that have filed for bankruptcy by considering 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
  

A Z-Score of more than 2.99 is considered to be a safe company. Those with a Z-Score of less than 1.8, on the other hand, have been shown to have a significant risk of financial distress within two years. We can see the checklist in action by applying it to a listed company. Take mid cap Stagecoach (LON:SGC), for example.

How does Stagecoach fare against Altman’s influential checklist?

What does the Altman Z-Score flag up about Stagecoach?

Stagecoach gets a Z-Score of 0.98, indicating that caution should be taken when considering this stock.

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