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Why Sydney Airport Holdings (ASX:SYD)'s share price might struggle to take off

11th Mar '19 by Jack Brumby

Avoiding big losses is just as important backing big winners when it comes to investing.

In terms of spotting red flags, there are a couple of proven checklists that make this task significantly easier and faster for shareholders. One of these - the Altman Z-Score - was found to be 72% accurate in predicting bankruptcy two years prior to the event in its initial test, and 80-90% accurate in predicting bankruptcy one year before the event.

You can read more about the Altman Z-Score in a study written by Edward I. Altman himself, called Predicting Financial Distress of Companies: Revisiting the Z-Score and Zeta® Models. It measures how closely a firm resembles other firms that have filed for bankruptcy by looking at:

  • How much of a firm's total assets are current assets,
  • Cumulative profitability and degree of leverage,
  • Productivity of assets, and
  • Firm value compared to liabilities

A Z-Score of more than 2.99 is considered safe. 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 large cap Airport Services group Sydney Airport Holdings (ASX:SYD), for example.

Does Sydney Airport Holdings pass Altman’s checklist?


What does the Altman Z-Score flag up about Sydney Airport Holdings Pty (ASX:SYD)?

Unfortunately, Sydney Airport Holdings Pty fails Altman’s test, with a worryingly low Z-Score of 0.59...

Here is a snapshot of what our algorithms flag as risks:


Sydney Airport Holdings Pty's low Z-Score doesn't mean that it is definitely heading for financial distress, but it does mean that current and potential shareholders in Sydney Airport Holdings should investigate why the group fails these safety checks. Furthermore, the fact that the group is set to pay out a forecast dividend yield of 5.3%, covered only 0.46 times by expected earnings, reduces the firm's ability to strengthen these weak spots.

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