Is Centrica's (LON:CNA) share price being held back by a weak balance sheet?

Is Centrica's (LON:CNA) share price being held back by a weak balance sheet?

Article image

In 2009, Morgan Stanley strategy analyst, Graham Secker, used the Z-score to rank a basket of European companies. He found that the companies with weaker balance sheets underperformed the market more than two-thirds of the time. Other studies have found similar results.

The takeaway? Screen out weak balance sheets.

One effective way to do this is to apply the Altman Z-Score, a checklist that was found to be up to 80-90% accurate in predicting bankruptcy one year before the event in the 31 years up until 1999 in the original study.

A Z-Score of more than 2.99 is considered to be a safe company, but a Z-Score of less than 1.8 points to a significant risk of financial distress within two years. We can see the checklist in action by applying it to a listed company. Take large cap value trap Centrica (LON:CNA), for example.

How does Centrica fare against Altman’s influential checklist?

What does the Altman Z-Score flag up about Centrica (LON:CNA)?

Unfortunately, Centrica fails Altman’s test, with a worryingly low Z-Score of 0.87...

5ca71fba62fc8image.png

Centrica's low Z-Score doesn't mean that it is definitely heading for financial distress, but it does mean this fate is more of a risk for Centrica than it is for most. The utilities group also qualifies for Stockopedia's Earnings Downgrade Momentum Screen - not good news, considering its FY18 12p dividend was only covered 0.27 times by reported earnings.


Next Steps

To find more stocks like Centrica, 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.


About us

Stockopedia helps individual investors make confident, profitable choices in the stock market. Our StockRank and factor investing toolbox unlocks institutional-quality insights into thousands of global stocks. Voted “Best Investment Research Tools” and “Best Research Service” at the 2021 UK Investor Magazine awards.

Centrica's StockRank™

NeutralBalanced

Centrica's StockRank™

With a StockRank of 75, Centrica is more attractive than 74% of the 7,464 stocks we cover in Europe, according to our proprietary ranking system.

See the full StockReport

Absolutely Perfect

"Trialed multiple other platforms - this is by far my favourite. Other platforms do not even have half the stuff that you can find on Stockopedia. Love it!"

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.