S&P 500 - Which Companies Are the Riskiest?

By using The Applied Finance Group’s (AFG's) Risk Analysis, we have identified the top and bottom two firms in each sector (excluding the Financial sector) according to an overall risk score based on 9 variables (see more detail below). In addition to the risk analysis variables we also added another layer of analysis by evaluating the companies’ Earnings Quality (based on the concept of Accruals) and Altman Z-Score (identifies firms that are at risk of going bankrupt in the next 2 years).

Applied Finance Group’s Risk Analysis is designed to systematically calculate a stock’s risk score based on fundamental relationships between the Quarterly Income Statements and Balance Sheets. The template measures 9 factors to determine Risk: Changes in A/R, Changes in Inventories, Cash Flow vs. Operating Cash Flow, Fixed Payments vs. Pre-Tax Cash Flow, Leverage, Intangibles, Write-offs, Management Quality, and Valuation. Companies with lower scores have less risk. Companies in the Financial Sector were excluded due to their differences in financial statement structure.

Here is a list of the variables that are taken into account within this risk analysis:

1. Receivables to Sales - Delta – takes the difference in the median A/R to Sales ratio over the last 4 quarters vs. median 4 quarters before that.
2. Inventories to Sales - Delta – takes the difference in the median Inventories to Sales ratio over the last 4 quarters vs. median 4 quarters before that.
3. AFG’s Cash Flow-Oper. vs. Operating Cash Flow - AFG's Cash Flow-Oper. for a company is net cash that is generated by the continuing and discontinuing operations of the firm. We compare it to the company's Operating Cash Flow to assess its ability to pay its debt.
4. Fixed Payments vs. Pre-tax Payments Cash Flow – This ratio assesses the company’s ability to cover long-term obligations. If the fixed pmts are greater than 50% of the pre-tax payments cash flow, there is chance that this company may not be able to meet its obligations. Obligations less than 30% of cash flow are considered safe.
5. Leverage – Book leverage and Market leverage are analyzed to give us information about the company’s leverage position. Best score is given to the companies with Book Leverage lower than 60%, and negative score to these with Book Leverage higher than 60% and Market Leverage greater than 0.9*Book Leverage.
6. Intangibles as a Percentage of Total Assets – With this score we try to filter through and reward the companies that have grown organically, rather than through acquisitions. Our research has shown that on average companies tend to overpay for acquisitions and thus are rarely a profitable investment. Companies with Intangibles less than 20% of Total Assets get the best score.
7. Write-offs – Shows the number of years with significant write-offs over the last 5 years.
8. Management Quality – Measures a company’s EM+1 and LFY Asset Growth and there is empirical evidence that companies with positive EMs that are able to grow their business tend to outperform companies with negative EMs who continue to invest into unprofitable business.
9. Value Score – Measures a company’s attractiveness from valuation perspective.
   

Most/Least Risky Firms By Sector S&P 500 (excluding financials)

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Comments

[User 390832:]

You are a little off on the Retail Food/Beverage Sector. Go into any Super Mart, and see the Ethnic population, of which I am one, Polish, and see what is the baskets. It is "Comfort" foods, beer, cheerios, Pepsi, chips, packaged meats. People will Eat, and will also go to lower priced Fast Food Chains. There is a choice, eat in, or out!

Apr 07 04:29 PM

[Robert DiAl...:]

I own some Fluor Corp. (FLR). I might add to my position on weakness. In my opinion I feel they have good upside. Just my opinion. I think they have good earnings and are primed to benefit from the economic stimulus package. They have very low debt and good institutional ownership. I am long FLR and have patience. Use your own judgment, just my opinion.

Apr 15 07:51 AM