Could National Grid Go Bust?

Before you go, we thought you'd like these...
Before you go close icon

LONDON -- You don't need me to tell you how the banking crash and recession have pushed many companies to the brink of bankruptcy. Shares such as the Royal Bank of Scotland, Dixons Retail, and MAN Group have collapsed 80% or more since the credit crunch erupted, and with the future in Europe and the banking sector still far from certain, many more companies could be at risk of going the same way

Like you no doubt, I'm always keen to ensure my potential investments aren't just about to go bust! Indeed, I'm convinced avoiding losers is just as important as picking winners in today's choppy market.

With all that in mind, I use something called a Z-Score to help me sidestep portfolio disasters. This Z-Score was developed in the 1960s and evaluates various financial ratios to provide an overall verdict on a company's strength. Effectively the higher the number the less likely the company is to go bust, although of course this is best taken in context of the Z-Score of its industry as a whole. Generally speaking, a score above 3 suggests the company is in very good health, while a score below 1.8 indicates the possibility of the firm going under. The Z-Score is not perfect of course, and you might want to read more about the details.


Today I'm assessing National Grid (ISE: NG.L) . Here are my Z-Score calculations:

Ratio

National Grid

Industry Average

Z-Score

1.85

1.61

Working Capital/Total Assets

-0.05

-0.01

Retained Earnings/Total Assets

0.28

0.11

EBIT/Total Assets

0.05

0.05

Market Value of Equity/Total Liabilities

2.02

1.11

Turnover/Total Assets

0.15

0.64

This analysis looked at full-year results ending March 31, 2012, for major U.K. electricity and gas distribution companies, including United Utilities (ISE: UU.L) and SSE (ISE: SSE.L) .

Although National Grid has a Z-Score of just 1.85, a low number is a general trend for this type of company, and 1.85 actually compares well to the industry average of 1.61. The majority of this strength comes from a higher market value than its competitors, which in turn stems from a large number of outstanding shares that have managed to hold their value.

Comparatively low levels of revenue and a large number of assets have the company's worst-performing ratio, turnover to total assets, at less than a quarter of the industry average. That said, a number of positive outliers may have skewed the mean level used here, and it should be noted that National Grid's number actually comes in at the median.

While the industry average Z-Score fell 1% year-on-year, that of National Grid increased from 1.76. That's a little over 5%, again mainly on the back of an increase in the company's market value. That said, the industry turnover to total asset level increased 19% from 0.54 the previous year, while that of National Grid held level at 0.15.

Although its revenue stream is weaker than some of its larger competitors, it still compares well to similar firms of its size. It has a strong market value and overall its financial strength would seem to be better than the industry average. More importantly, it has improved its position at a time when that of the sector as a whole weakened. 

So could National Grid go bust? Well, things could be better, but they could be a lot worse!

Finally, if you are looking for share ideas from somebody who has avoided the worst of the recession, you must read this special free report about Neil Woodford.

You see, Woodford runs portfolios that total a staggering 20 billion pounds and famously sold out of banking shares well before the credit crunch. Right now, he's focusing on a small collection of defensive, dividend-paying shares, the full details of which can be found in "8 Income Shares Held By Britain's Super Investor."

By closely studying accounts for problems, Woodford has seen his blue-chip portfolios soar up to 347% during the 15 years to 2011.

If you, like Woodford, are concerned about today's global economy, I urge you to download this Neil Woodford report while it is still free and available.

Are you looking to profit from this uncertain economy? "10 Steps To Making A Million In The Market" is the very latest Motley Fool guide to help Britain invest. Better. We urge you to read the report today -- it's free.

Further Motley Fool investment opportunities

At the time this article was published Karl does not own any of the shares mentioned in this article. The Motley Fool has adisclosure policy.
We Fools may not all hold the same opinions, but we all believe that
considering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners