The Motley Fool

Could Purplebricks go bust?

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.

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...

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.

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.

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

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.