The Motley Fool

Could Sirius Minerals go bust?

With so much news-driven share price moves for your 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.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

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.

Below I have calculated the Z-Score for Sirius Minerals (LSE: SXX), compared it to similar firms including CF Industries and Mosaic Co, and the results were very telling. These numbers are based on the financial report ending December 31, 2018.

Ratio

Sirius

Industry Average

Z-Score

0.96

6.47

Working Capital/Total Assets

0.02

0.62

Retained Earnings/Total Assets

-0.01

0.2

EBIT/Total Assets

-0.01

0.29

Market Value of Equity/Total Liabilities

1.66

1.32

Revenue/Total Assets

0

3.71

As you can see, Sirius’ Z-Score of 0.96 is not only far below the industry average, but is very much in the danger zone. It is, however, worth noting that this number reflects the company’s lack of revenue, and so may not be an entirely comprehensive assessment of its prospects – if you believe, that is – that it can hold on until its Woodsmith mine goes into production in 2021.

It’s also worth keeping in mind that this number is based on historical data, and with the company expected to raise up to $500m with a bond issue this year (having already raised $425m through the sale of new shares), it will be interesting to reassess the figures once again, with the 2019 year-end results.

What does this mean for investors then? Is this a company with a lot of potential going cheap, or is it just too risky to invest in?

My opinion at this stage is that it’s a gamble. Even with the pressure on its shares as of late, there may still be more room on the downside for the stock as its financing package (which is raising the funding it will need to get the mine dug and the proposed 23-mile conveyor built) comes into play. This, of course, doesn’t take into account any unexpected costs arising as things progress – the need for yet more money is bound to hit the shares hard if and when this happens.

If the company can hold on and go in to production, however, it is sitting on the world’s largest and highest grade deposit of polyhalite, offering a lot of upside for investors the closer we get to the mine going into operation. Sirius certainly isn’t the safest bet I have come across, but it might be worth keeping an eye on as the year continues.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Neither Karl nor The Motley Fool UK have a 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

The renowned 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 enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.