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Is Intercontinental Hotels's Share Price Being Held Back By A Weak Balance Sheet?

Published 04/03/2020, 06:27
Updated 09/07/2023, 11:32

In 2009, Morgan Stanley (NYSE:MS) strategy analyst, Graham Secker, used the Z-score to rank a basket of European companies. He found that the companies with weaker balance sheets underperformed the market more than two-thirds of the time. Other studies have found similar results.

The takeaway? Screen out weak balance sheets.

One effective way to do this is to apply the Altman Z-Score, a checklist that was found to be up to 80-90% accurate in predicting bankruptcy one year before the event in the 31 years up until 1999 in the original study.

A Z-Score of more than 2.99 is considered to be a safe company, but a Z-Score of less than 1.8 points to a significant risk of financial distress within two years. We can see the checklist in action by applying it to a listed company. Take large cap falling star Intercontinental Hotels (LON:IHG). for example.

How does Intercontinental Hotels fare against Altman’s influential checklist?

What does the Altman Z-Score flag up about Intercontinental Hotels?

Unfortunately, Intercontinental Hotels fails Altman’s test, with a worryingly low Z-Score of 0.59... Intercontinental Hotels's low Z-Score doesn't mean that it is definitely heading for financial distress, but it does mean this fate is more of a risk for the group than it is for most.

Specifically, our algorithms flag the following as risks:

Intercontinental Hotels Z Score

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Disclaimer: These articles are provided for information purposes only. The content is not intended to be a personal recommendation. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser. The author has no position in the stocks mentioned, unless otherwise stated.

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