The Motley Fool

Could Thomas Cook go bust?

Image source: Getty Images.

With so much news-driven share price movement 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. Generally, anything above 3 is pretty solid, while anything below 1.8 is much riskier. 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 Thomas Cook (LSE: TCG), compared it to similar firms including TUI AG and Dart Group, owner of Jet2. These numbers are based on the companies’ most recent full-year reports.

Ratio

Thomas Cook

Industry Average

Z-Score

1.85

1.82

Working Capital/Total Assets

-0.32

-0.1

Retained Earnings/Total Assets

0.05

0.08

EBIT/Total Assets

-0.01

0.04

Market Value of Equity/Total Liabilities

1.22

0.73

Revenue/Total Assets

1.46

1.26

Surprisingly, given the turmoil the company has been suffering this year, the Z-Score of 1.85 comes in at about the industry average. One caveat I would give, however, is that the latest full-year results for Thomas Cook are for 2018, and so more updated figures may have a dramatic impact on the number.

Both Thomas Cook and the industry as a whole are hovering in the danger zone of 1.8. This is perhaps a result of the specifics of the industry and reflects the underlying weakness of travel and tour operators if things do go wrong.

For Thomas Cook, the latest news would actually suggest the biggest risk for shareholders and investors at the moment is not necessarily the company going bust, but the shares being delisted if and when its £900m rescue deal goes through.

Towards the end of last month, Thomas Cook confirmed it had agreed the main terms of a rescue deal that would Chinese conglomerate and major shareholder Fosun, put up £450m for a 75% stake in its travel business and a 25% stake in its airline.

At the same time, the company negotiated terms with its current lenders – mainly banks and bond holders – to also inject an additional £450m into it for 75% equity in the airline and 25% equity in the travel business. Unfortunately for current shareholders, these terms may end up with little left over for them.

Thomas Cook admits the deal will highly dilute current shareholdings, and although it made a statement saying it currently has no plans to delist the shares, it did hint at the fact it may have to do so in future.

Looking at the Z-Score, it may not look particularly likely that Thomas Cook will be going bust, but if it’s bought up and taken off the open market, the end result could be the same for investors. This is definitely a stock I am avoiding.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Karl has no position 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.

Where to invest £1,000 right now

Renowned stock-picker Mark Rogers and his select team of expert analysts at The Motley Fool UK have just revealed 6 "Best Buy" shares that they believe UK investors should consider buying NOW.

So if you’re looking for more top stock ideas to try and best position your portfolio in this market, then I have some good news for your today -- 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.