Altman Z-score & Piotroski Score

      

If you are still reading this blog, then welcome me back. I just realized i have no blog post for September 2011. It worries me. No post means I haven't tried reading or learning anything new for September. 

So before the remaining three months of year 2011 is over, I'll try to post as much as I can and learn new things or reinforce learnings in the process.

For October, i want to apply Altman Z-score in companies i am currently invested in for analysis. If you have been following the Philippine Stock Market, you know that most of the stocks are in red. The stock market has been going up and down that most of us don't know whether we are in bear market or bull market. Personally, i think we are still in the bull market given the good financial performance reported by Philippine Companies for the first half of 2011. Nevertheless, my portfolio is also in red so don't trust me too much.

Having said that, we should never forget how important to look at solid companies in investing. Using the fiscal fitness analysis or more known as Altman Z-Score, let's see how my favorite companies fare. Hopefully, through this process, I will learn and convince myself more of being a good investor.

Altman Z-Score

My first encounter with Altman Z-Score was back in 2009 during my refresher course in Finance Subjects. The professor was a believer of this formula and informs us that it is a good basis for predicting bankruptcy of companies. Here's what wikipedia has to say about this formula

From wikipedia The Z-score formula for predicting bankruptcy was published in 1968 by Edward I. Altman, who was, at the time, an Assistant Professor of Finance at New York University. The formula may be used to predict the probability that a firm will go into bankruptcy within two years. Z-scores are used to predict corporate defaults and an easy-to-calculate control measure for the financial distress status of companies in academic studies. The Z-score uses multiple corporate income and balance sheet values to measure the financial health of a company.

This post will not be about whether Altman Z-Score works but rather how Semirara Mining Company (SCC) fares in this formula

Using the 2011 PSE Quarterly filing, SCC scores 3.51 which is above the safe zone. In other words, SCC is a safe company to invest in.

Piotroski Score

From GrahamInvestor.com University of Chicago Accounting Professor, Joseph Piotroski reasoned that because value stocks are by definition often troubled companies, many will not possess the financial resources to recover. Consequently, Piotroski wondered if it was possible to improve the performance of a value stock portfolio by eliminating stocks that were the weakest financially.

Piotroski devised a simple nine-criteria stock-scoring system for evaluating a stock's financial strength that could be determined using data solely from financial statements.

One point was awarded for each test that a stock passed. Piotroski classed any stocks that scored eight or nine points as being the strongest stocks. His findings were that these strong stocks as a group outperformed a portfolio of all value stocks by 7.5% annually over a 20-year test period. Piotroski also found that weak stocks, scoring two points or fewer, were five times more likely to either go bankrupt or delist due to financial problems.

Using the 2011 PSE Quarterly filing, SCC scores 9 points using Piotroski Score

Conclusion

SCC passes both the Altman Z-Score and Pioroski Score. Nevertheless, these numbers are not enough. I wanted to apply industry analysis on SCC only that I am not yet familiar with the competitors. I'll read last year's annual filing and see if I can learn more about the company and its industry. Once i know the competitors, I'll do industry wide analysis.