I am currently my investment in £SCS. Leaving the chart and sentiment aside, in my view most things seem to be rosy, but I notice that it now qualifies for the Z2-Score short selling screen and was hoping to get some views on whether this is really something to be concerned about in this instance.
Digging into the method behind the score, it seems that the first component "T1" is having an outsized effect on the overall rating. The T1 test is Working Capital/Total Assets TTM > 0.2375. SCS has very low working capital at £7m vs total current liabilities of £106m leading to a terrible T1 score of 0.03.
It also fails the "T4" test - Market Value of Equity / Book Value of Total Liabilities, though this is less heavily weighted.
I note that it's the Z2 score that has been used because SCS isn't a manufacturing business...except that it sort of is, isn't it? I believe that it would score much more highly on the Z1 score, which more heavily weights "T3" - Earnings Before Interest and Taxes / Total Assets.
Is it the case that the low working capital is just a feature (advantage?) of the business model?
My feeling is that the Z2 score isn't really anything to worry about in this case, but would be very interested in any other views.
