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Aurora Cannabis: Predicting Bankruptcy

Mar. 10, 2020 7:30 AM ETAurora Cannabis Inc. (ACB), ACB:CA62 Comments
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  • Aurora's Altman Z Score has fallen once again, and it's currently in the distressed zone along with its peers.
  • The company's bankruptcy risk is quite high but its management can still turn things around before it's too late.
  • The stock may fall further to more reasonable trading multiples.

Aurora Cannabis (NASDAQ:ACB) has performed poorly over the last year. Its quarterly revenues have continuously dropped across multiple end-markets, there's no action plan in sight to trigger its turnaround and its shares have, consequently, plunged by about 85% over the period. There's now speculation floating across various investing forums that the company would file for bankruptcy in the near future, which, given its financial health, seems like a highly probable outcome. Let's take a closer look to have a better understanding of it all.

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The Bankruptcy Predictor

Let me start by saying that credit rating agencies across the globe use various kinds of stress tests to measure a company's financial health before eventually assigning it a rating. While some tests may over exaggerate its underlying issues, others might provide false positives or completely miss the issues altogether. So, this isn't a fool proof method.

One of these stress tests is the Altman Z Score. It's a linear formula that involves five business ratios and it's internationally used to predict the bankruptcy risk for both manufacturing and non-manufacturing firms. It basically assesses a company's existing financial health, based on events that have already taken place, which means that it's a lagging indicator.

The formula goes as:

Z = 1.2*A + 1.4*B + 3.3*C + 0.6*D + 1.0*E

Here, each of the variables are defined as:

A = Working Capital / Total Assets

B = Retained Earnings / Total Sales

C = EBIT / Total Sales

D = Market Cap / Total Liabilities

E = Sales / Total Assets

The final Z score gets classified into three zones.

  • If the Z score is above 2.99, it's considered to be the safe zone
  • If the Z score is between 1.81 and 2.99, it's considered to be in the

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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