IP-WARS.NET || Can Z-Score Predict SCOX Bankruptcy?

Can Z-Score Predict SCOX Bankruptcy?

By JCausey, Section SCO Related Articles
Posted on Thu Jan 26th, 2006 at 11:48:38 EST

Yesterday (Wednesday, 1/25) I happened to catch a little bit of an interview with Edward Altman on CNBC concerning his Z-Score. It is a tool he developed many years ago to try to predict the probability of bankruptcy of a company. Apparently he has further refined it to generate something equivalent to a bond rating and pinpoint even more accurately when/if a company will go bankrupt. A couple examples he included were airlines, so I wasn't too impressed with that.

According to one site though, this formula is accurate 72% of the time at predicting bankruptcy within 2 years.

Anyway, I thought it would be interesting to try it out on SCOX. So here is the data I gathered from their last annual financials:

EBIT: -10,453,000
Total Assets: 28,948,000
Net Sales: 17,691,000 (unclear to me whether you would pull this before or after COGS is factored in, so I used gross margin)
Market Value of Equity: 69,336,000 (I had to guess that this is the same thing as market cap)
Total Liabilities: 16,953,000
Current Assets: 24,924,000
Current Liabilities: 16,255,000
Retained Earnings: 11,337,000 (I am guessing this is the same as stockholder's equity, but I imagine there are other components of stockholder's equity besides Retained Earnings)

Running the formula with those numbers gives me a score of 2.83, which according to the Creditguru site indicates one should be "On Alert". This is very close to slipping into the range where bankruptcy within two years is indicated.

That seems to be pretty consisent with my previous calculations related to SCOX - they are in poor shape, but bankruptcy is not a given.

Thanks for reading,
Jeff

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Can Z-Score Predict SCOX Bankruptcy? | 9 comments (9 topical, 0 editorial, 5 hidden)

Re: Can Z-Score Predict SCOX Bankruptcy? (none / 2) (#2)
by nealywilly on Sat Mar 11th, 2006 at 18:36:21 EST
(User Info)

The Z-score is legit. I followed Altman's work to develop a major US insurance company's predictive default model almost 20 years ago and it was very successfull for them. At the time our's was more robust and predictive than quoted for Altman's model, but his work founded and predated mine by 20 years. My former employer still uses an updated version of it today (and they also still use the name I coined for it based on an article I recently read). Altman used multiple discrimant analysis and I did the same using SAS (then SPSS).

Anyway, SCO's clearly headed to bankruptcy, despite what it's Z-score says. Just a note that I'm sure will push SCO into the walking dead score range is that retained earnings are the cummulative earnings since inception/formation, so using stockholder's equity grossly overstates their case (i.e., makes them look more favorable) because you've included all the equity investments they received (not just the $50MM PIPE and recent $10MM infusion, but original IPO proceeds).

The retained earnings you should use for SCO is -$234,942,000. Yes that's a huge negative number. You only get it in the SEC filings, it's not broken out in the earnings releases. BTW, The 1st Quarter 10Q needs to be filed Wednesday (3/15) to be on time.

FYI - I'm a career corporate finance/investment guy that has no financial interest in SCOX or any other parties to their litigation unless they're in my broad-based mutual investments. Same applies to the past and the future for SCOX.

Re: Can Z-Score Predict SCOX Bankruptcy? by JCausey, 03/13/2006 20:20:53 EST (none / 1)

Bye bye spambot (none / 1) (#8)
by Potential Recruit on Mon Nov 27th, 2006 at 14:07:57 EST

This used to be a spambot post that is flooding the site. Due to volume, I had to resort to this while I work to block access by these bots. My apologies - thanks for your patience.

Jeff

Bye bye spambot (none / 0) (#9)
by Potential Recruit on Tue Nov 28th, 2006 at 12:38:30 EST

This used to be a spambot post that is flooding the site. Due to volume, I had to resort to this while I work to block access by these bots. My apologies - thanks for your patience.

Jeff

Can Z-Score Predict SCOX Bankruptcy? | 9 comments (9 topical, 0 editorial, 5 hidden)

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