Is Carnival's 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 large cap contrarian Carnival (LON:CCL), for example, which provides vacations to various cruise destinations throughout the world
How does Carnival fare against Altman’s influential checklist?
What does the Altman Z-Score flag up about Carnival?
Unfortunately, Carnival fails Altman’s test, with a worryingly low Z-Score of 1.65... Carnival's low Z-Score doesn't mean that it is definitely heading for financial distress, but it does mean this fate is more of a risk for the group than it is for most.
To view a breakdown of Carnivan's Z-Score, view its StockReport here with a free trial of Stockopedia.
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