J D Wetherspoon's (LON:JDW) Altman Z-Score: pass or fail?

J D Wetherspoon's (LON:JDW) Altman Z-Score: pass or fail?

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J D Wetherspoon's (LON:JDW) share price has been surging ahead recently, up by more than 20% since the start of 2019 as the UK's most recognisable pub chain continues to post bumper like-for-like sales growth.

The group's shares trade at near all-time highs and momentum is clearly on its side, but at 17.7 times forecast earnings, just how high a multiple can a relatively mature pub chain command? Wetherspoon's has arguably more scope than most to raise prices across its estate, but it will be wary of increasing prices too much as this runs the risk of compromising its strong brand reputation for value for money.

But the reason why J D Wetherspoon flashed across my screens actually has less to do with robust trading and more to do with its financial safety - because this pub group currently fails our Altman Z-Score test, which is designed to flag up potential bankruptcy risk.

So could J D Wetherspoon really be heading for financial distress?

Why does J D Wetherspoon have a weak Altman Z-Score?

The Altman Z-Score is a statistical model built on research that used ratio analysis to identify likely business failures and, in incorporating numerous ratios into a single bankruptcy prediction model, marked a step forward in academic investment research. 

Using discriminant analysis to differentiate between bankrupt and non-bankrupt companies, Altman formulated 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.

The model settled on five ratios:

  • Liquidity risk - net working capital divided by total assets
  • Relative age and accumulated profitability - retained earnings divided by total assets
  • Return on assets - EBIT divided by total assets
  • Leverage - market value of equity divided by book value of liabilities
  • Sales generation - sales divided by total assets

As there is a wide variation among industries in asset turnover, we have dropped the fifth ratio for non-manufacturing companies. 

When the relevant ratios are fed through this regression model, we compute a Z-Score. 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. 

J D Wetherspoon's Z-Score? 1.07. Here are the areas flagged up as a risk by this financial safety check:

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It is worth noting that J D Wetherspoon passes the EBIT/Assets check, which is viewed as the most important.

As for the two fails? I would put this down to the large asset bases most pub groups tend to build when they operate from largely freehold estates, as J D Wetherspoon does. JDW has net property, plant and equipment of £1.3bn on its balance sheet, compared to £790m of debt. My hunch is that the risks to liquidity and solvency are overstated - the next step in confirming or denying this might be to compare J D Wetherspoon's balance sheet to its listed peers.


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