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Is Mitie's (LON:MTO) share price being weighed down by a weak balance sheet?

18th Mar '19 by Jack Brumby

Screening out weak balance sheets is one of the most effective ways of reducing risk in your portfolio.

One simple way to do this is to apply Stockopedia's take on 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. We can see it in action by applying it to facilities management group Mitie (LON:MTO), which is one of those companies that is often preceded by the adjective "troubled".

Outsourcing is a tough business. Carillion went bust in 2018, a couple of years after Serco lost 75% of its value. Mitie has been a similar story, with its share price having more or less halved over the past five years in what has proven to be a relentless downward drift.

So, how does it fare against Altman’s influential checklist?


What does the Altman Z-Score flag up about Mitie (LON:MTO)?

Unfortunately, Mitie fails Altman’s test, with a worryingly low Z-Score of -0.24. This is well below the distress threshold of 1.8...

Mitie'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 Mitie than it is for most. Given the fortunes of its peers, and the fact that nearly 6% of its stock remains loaned out to short parties, there appear to be more risks to the downside than the upside.

Here's exactly how Mitie fails the Z-Score:


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The problem areas for Mitie identified here can be explored in more depth on Stockopedia's research platform. All the best investors have stringent due diligence processes that reduce the chances of them suffering big losses, so why not take a leaf out of their book?

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