Seeking Alpha
AFG Indexes, AFG Indexes (21 clicks)
Long/short equity, value, growth at reasonable price, long-term horizon
Profile| Send Message| ()  

Recently, Moody’s released a list of what they call “Bottom Rung Companies” (click here for a link to a blog listing several of the companies, accompanied by an industry breakdown of where these firms are located) which is based on the company’s ability, or lack thereof, to pay back the debt it owes. The 283 companies on the list roughly represent the riskiest 15% of all firms that Moody’s tracks. Moody’s does not always designate the most appropriate ratings (Fannie Mae (FNM) and Freddie Mac (FRE) were rated AAA before defaulting), so we decided to take their list into our own hands and provide the true bottom rung companies.

With so much negative news going around and many companies declaring bankruptcy, it is no surprise that measures of a firm’s financial strength, such as the Altman Z-Score (likelihood of a company to go bankrupt in the next 2 years), have been re-gaining popularity in the current market environment. So to help with our analysis, we used the Z-Score metric to analyze the companies on Moody’s list, as well as The Applied Finance Group’s (AFG’s) screening variables to determine how attractive these firms are from a valuation standpoint, and how each company’s forecasted profitability for their fiscal 2009 year looks (Forecasted Economic Margin). As a result, ValueExpectations.com has put together a list of the 17 “riskiest” companies to avoid. Each of these companies have “at risk” level Z-Scores, unattractive valuations, and are forecasted to achieve negative profitability (EM) for their 2009 fiscal year, all of which indicate that they will be more likely to underperform.

Below the table (click to enlarge) is a short description of the Altman Z-score and a breakdown of what the scores mean, along with a brief description of what Economic Margin (EM) is and how it is calculated.

17 Companies At Risk of Bankruptcy

The Altman Z-score defined: A metric that gives insights into the likelihood of a firm going bankrupt in the next 2 years. The model was developed by Professor Edward I. Altman of NYU’s Stern School of Business and first published in The Journal of FINANCE in September 1968.

The Altman Z-Score breaks down firms into 3 zones:

• >2.99 – Not Likely to go Bankrupt


• 1.8 - 2.99 – Gray Area


• <1.8 – Likely to go Bankrupt in the Next 2 Years


Economic Margin (EM) Defined: A measure of corporate performance that captures off balance sheet items, by looking at how much a company is earning above or below their cost of capital. EM is expressed in a % or margin. The Economic Margin Framework™ is more than just a performance metric as it encompasses a valuation system that explicitly addresses the four main drivers of enterprise value: profitability, competition, growth and cost of capital.

Economic Margin Calculation (click to enlarge):

Source: 17 True 'Bottom Rung' Companies