The Motley Fool

Could Purplebricks go bust?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Person using calculator next to charts and graphs
Image source: Getty Images.

With so much news-driven share price moves for the average stock these days, it is often easy to overlook the base financials of a company. To the uninitiated, a company’s financial report can be intimidating, and headlines about revenue or EBITDA can be the extent to which some investors look at the numbers. However one metric I like to use to gauge a company’s strength is known as the Altman Z-Score.

This calculation is effectively a credit-strength test that gives a listed company a number based on five key financial ratios. As a rule, anything above 3 is pretty solid, while anything below 1.8 is a riskier prospect. Of course, the number needs to be taken in context, and should always be viewed in relation to a sector or industry average.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

Below I have calculated the Z-Score for Purplebricks (LSE: PURP), compared it to similar firms including Foxtons Group and Hunters Property, and the results were very telling. These numbers are based on the companies’ most recent full-year reports.

Ratio

Purplebricks

Industry Average

Z-Score

9.81

5.36

Working Capital/Total Assets

0.83

0.32

Retained Earnings/Total Assets

-0.17

0.22

EBIT/Total Assets

-0.15

-0.06

Market Value of Equity/Total Liabilities

15.01

6.92

Revenue/Total Assets

0.54

0.72

Needless to say, these results are somewhat surprising – Purplebricks shows a healthy 9.81, even beating the industry average. Of course, there are some things we must take note of. Firstly, the financial report for Purplebricks was for the year ending April 2018 (its latest FY report at present), so these numbers are not necessarily reflective of its current position.

Also, when assessing the company against its peers, in some ways it is too unique for an accurate comparison. Traditional estate agents could arguably have a different business model that makes a like-for-like evaluation somewhat skewed. There are perhaps other firms that could be comparable in some ways, but for the purposes of an industry average, here we focus on estate agents specifically.

As you can see from the table, Purplebricks’ strong Z-Score comes in large part thanks to the market value of its equity. Even at current share prices, the large number of shares it has in issue is helping to firm up its numbers. Needless to say this is not necessarily the strongest of foundations to keep a company afloat.

What is interesting however, is that to a certain extent, our expectations of what we know the company is planning may in fact help this number. Pulling out of international markets is likely to reduce assets and liabilities, and the latest official guidance from the company said it expects total revenue of £130m to £140m for the year. With these figures, Purplebricks’ Z-Score is still likely to hold above the crucial 3 level.

Of course this number alone isn’t enough to make an investment decision. The rapid expansion into a global marketplace (which it will now have to scale back), a weakening property market and an increase in rival firms are all going to keep the ground shaky for it in the near future. But one thing this number does show us, is that perhaps the firm’s prospects are not quite as dire, for now, as we all may have thought.

One Killer Stock For The Cybersecurity Surge

Cybersecurity is surging, with experts predicting that the cybersecurity market will reach US$366 billion by 2028more than double what it is today!

And with that kind of growth, this North American company stands to be the biggest winner.

Because their patented “self-repairing” technology is changing the cybersecurity landscape as we know it…

We think it has the potential to become the next famous tech success story.

In fact, we think it could become as big… or even BIGGER than Shopify.

Click here to see how you can uncover the name of this North American stock that’s taking over Silicon Valley, one device at a time…

Karl has no positions in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.