I read an interesting article in Businessweek entitled "Stocks:Bracing for more bankruptcies" where the author noted that in 2009 he expects the bankruptcy rate will increase. In the article, the author cites that Edward Altman (NYU) was predicting a double-digit bankruptcy rate for 2009.
Altman was the author of "Financial Ratios, Discriminant Analysis and the prediction of Corporate Bankruptcy" published in the Journal of Finance in 1968, from which the "Altman Z-Score" became the standard in assessing a firm's probability of going bankrupt. If you are interested in calculating the Altman Z-Score for your company, the formular is relatively simple, and this website makes it even easier... just plug in the required financial statement variables and take a look at your resulting score. Perhaps before you make your stock recommendation it'd be worth checking if your company is expected to be around for the rest of the year.
Ben Steverman has some interesting points in this article. The bankruptcy filings for Americans is up in the last few months and I would expect that companies will follow suit. The article did mention though that this recession will take the weak ones out of the market place. With slack credit guidelines, too many unqualified companies were getting money when they are not going to be in the position to pay it all back. While this is unfortunate that so many lives will be affected by numerous companies failing, hopefully our economy will learn from this and we will emerge far stronger than before.
ReplyDeleteAs for my company, it received a Altman Z-score of 1.28 which means "Probability of Financial embarrassment is very high". I hope not but time will tell how my company will fair.
I second what Adam wrote about our economy emerging even stronger once we weather the storm. The fact of the matter is that a lot of unhealthy businesses are being weeded out. Sure, some good businesses are going down also, but it seems like most strong businesses will survive while most weak businesses won't.
ReplyDeleteThere was an article published on the University's website that stated similar findings. The article cited a study undertaken by finance researchers. This study found that 80% of companies with sound business models, reorganized and emerged from Chapter 11 bankruptcy with only 7% fewer assets that before declaring bankruptcy. Approximately 37% of businesses with poor business models reorganized with less than 50% of their original assets. The rest of the companies were liquidated or purchased by other firms.
The article argues that the US bankruptcy system works. Strong companies going through hard times emerge and weak companies don't.
Basically, there is a silver lining to all this bankruptcy (I hope). Although it may take a few years of turmoil, our economy will come back stronger having learned (at least temporarily) from its mistakes.
Oh yeah, the article can be found at http://unews.utah.edu/p/?r=010809-1.
Anyone still around next fall should consider taking the Finance 6570 Financial Distress class taught by Liz Tashjian who wrote the paper the aforementioned article cites. Something else to consider that I learned in her class was that during economic downturns companies with strong balance sheets (i.e. more assets, less liabilities) relative to their competitors tend to grab market share from weaker players and emerge from downturns with higher margins. Not only do downturns weed out the sick but they also reward the strong.
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