Probability Of Bankruptcy

Indicator Description

The Probability of Bankruptcy SHOULD NOT be confused with the actual chance of a company to file for chapter 7, 11, 12, or 13 bankruptcy protection. Macroaxis simply defines Financial Distress as an operational condition where a company is having difficulty meeting its current financial obligations towards its creditors or delivering on the expectations of its investors. Macroaxis derives these conditions daily from both public financial statements as well as analysis of stock prices reacting to market conditions or economic downturns, including short-term and long-term historical volatility. Other factors taken into account include analysis of liquidity, revenue patterns, R&D expenses, and commitments, as well as public headlines and social sentiment.

Probability Of Bankruptcy 
 = 
Normalized 
 
Z-Score 

Probability Of Bankruptcy is a relative measure of the likelihood of financial distress. For stocks, the Probability Of Bankruptcy is the normalized value of Z-Score. For funds and ETFs, it is derived from a multi-factor model developed by Macroaxis. The score is used to predict the probability of a firm or a fund experiencing financial distress within the next 24 months. Unlike Z-Score, Probability Of Bankruptcy is the value between 0 and 100, indicating the firm's actual probability it will be financially distressed in the next 2 fiscal years.

Probability Of Bankruptcy In A Nutshell

When looking at the probability of bankruptcy, you want to ensure there is a normalized z-score, which means you do not want the data to be too far from the mean, which is what the z-score measures. When looking at this data point, the probability of bankruptcy is a value between 0 and 100, which will tell you the probability of the company having financial distress in the next 2 years. This is very important to consider because you do not want to invest in a company that is potentially going under.

This data point is certainly a complicated one because you can look at it in either a statistical light or a matter of fact light. When you look at a company that is struggling, you can certainly tell by just how things are and by something simple as cash flow if they are going to succeed. Benjamin Graham, the most well known person of value investing searched for these types of distressed companies, but that is a story for another day. As stated here on Macroaxis, probability of bankruptcy should not be confused with the actual chance of a company to file for bankruptcy protection.

Closer Look at Probability Of Bankruptcy

Taking it a little bit further, besides the obvious reasons of the company being worth nothing, you can use this tool to help you find value stocks. As alluded too, this is when you look for struggling companies, but the idea is that there is limited to no debt and the company has enough cash to survive the down times. Of course there are other factors, but that is why using the probability of bankruptcy in this scenario may prove useful.

This type of information is purely fundamental and should be used as such. When looking at charts, you may see a stocks price begin to tank and take on pressure, this is a prime time to take a look and run the probability of bankruptcy, to know in the near term if the business is going to viable. There are other items you would want to take a look at such as the executive’s comments and the tone of the room. Listen in on the conference calls and determine what everyone is saying, as this will give you the best feel of where the company is headed. Bankruptcy is a last resort due to the many implications it poses, but do know a company can come close to bankruptcy and still prove to be a winner.

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Check out your portfolio center. Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.

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