Is Petrofac's (LON:PFC) 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 mid cap style neutral Petrofac (LON:PFC), for example.

How does Petrofac fare against Altman’s influential checklist?

What does the Altman Z-Score flag up about Petrofac (LON:PFC)?

Altman’s test gives Petrofac Z-Score of 1.66 - not the worst, but below the 1.8 level that marks the start of the distress zone.

Petrofac's low Z-Score doesn't mean that it is definitely heading for trouble, but it does mean this fate is more of a risk for Petrofac than it is for most.

Specifically, our algorithms flag the following as risks:

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