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

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...

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.

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