Is Sirius Minerals' weak balance sheet cause for concern?

Business distress and bankruptcy can put a dent in your portfolio no matter how well diversified you are. 

The Z-Score was developed by New York University finance professor and leading academic, Edward I. Altman. It 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 popular mid cap potash play Sirius Minerals (LON:SXX), for example.

How does Sirius Minerals fare against Altman’s influential checklist?

What does the Altman Z-Score flag up about Sirius Minerals?

Unfortunately, Sirius Minerals fails Altman’s test, with a low Z-Score of  1.57...

Sirius Minerals's low Z-Score doesn't mean that it is definitely heading for financial distress, but it does mean we should be aware of the risks with this pre-revenue stock.

Specifically, our algorithms flag the following as risks:

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. This quick look at Sirius Minerals shows that it also has weak spots that require further investigation.

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