Why Mitchells & Butlers' share price is at risk
“At the end of the day, the most important thing is how good are you at risk control.”
So said legendary stock trader Paul Tudor Jones. Investors would do well to heed his advice. Big losses are the death knell to a portfolio, and that’s why great investors focus on risk just as much as returns - no matter how tempting it is to get carried away with future prospects.
Some very smart people have come up with proven checklists over the years that can drastically improve risk management with minimal effort. One of them was found to be:
- 72% accurate in predicting bankruptcy two years prior to the event in its initial test
- 80-90% accurate in predicting bankruptcy one year before the event in the 31 years up until 1999
I'm talking about the Altman Z-Score, which measures the degree to which a stock resembles companies that have gone bankrupt in the past. Clearly, avoiding the stocks this checklist highlights could save us a lot of pain in the long run. And what it says about Hotels & Entertainment Services operator
Mitchells & Butlers (LON:MAB) might well be keeping the group’s chief financial officer, Tim Jones, up at night...
Using the Z-Score to protect your portfolio
The Z-Score has proven very effective in predicting business distress. It measures how closely a firm resembles other firms that have filed for bankruptcy by looking for red flags in 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
If we apply it to Mitchells & Butlers what do we get? A Z-Score of 0.87 - well below the cut-off point that signals potential distress...
Steering clear of stocks that fail these checks means you are avoiding companies that exhibit similar financial characteristics to companies that have gone bankrupt in the past, often as a result of having a weak balance sheet.
Next Steps
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