Screening U.S. Equities for Corporate Bankruptcy Risk
Summary
The document discusses ways to assess whether publicly traded U.S. companies may face bankruptcy, with the aim of informing decisions from short-term trading through long-term investing. One response suggests tracking financial ratios such as leverage, earnings, net income, and cash per share, while noting that distressed-looking firms may continue trading or undergo takeovers instead of filing. It also points to sector risk, including pharmaceutical companies, and mentions equity screeners and research services as discovery tools.
A second response recommends using public-company filings such as quarterly and annual reports to apply Altman’s Z-score approach: compare fundamental ratios with historical outcomes for firms that later went bankrupt. It cites expected default frequency models as an example of related credit-risk analysis. These are screening approaches, not definitive bankruptcy forecasts; the discussion emphasizes uncertainty, differences in bankruptcy outcomes, and the limits of inferring filing risk from apparent distress or market labels.
Key ideas
- Financial ratios such as leverage, earnings, and cash can help identify firms for closer review.
- Companies that appear distressed may remain listed or undergo a takeover instead of filing for bankruptcy.
- Altman’s Z-score approach compares company ratios with historical bankruptcy outcomes.
- Public filings provide fundamental data for applying comparative distress analysis.
- Screeners and research services can help find candidates but do not establish bankruptcy probability on their own.
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Full text
# Criteria to assess the possibility of corporate bankruptcies in U.S. equity exchange markets # Criteria to assess the possibility of corporate bankruptcies in U.S. equity exchange markets Which criteria do you suggest to measure the susceptibility of bankruptcies (e.g., Chapter 11, 7) for a company in a U.S. equity exchange market (e.g., `NYSE`, `Nasdaq`, `OTC`) that may lower the risks of short-term trading to long-term investing? ## Answer by Emma Marcier (score 9, accepted) https://quant.stackexchange.com/a/44148 #### I have been told: Bankruptcy is very controversial Google Scholar Researchers. You might track companies ratios (e.g., `debt to equity ratio`, `EPS`, `net income`, `cash per share (cash/sh)`, etc.). For instance, GE looks almost bankrupt. But, it is not and there is a very low probability that GE would file for any bankruptcy chapter, I'm just guessing. There are many companies, especially in OTC markets, that many investors consider them "bankrupt", but "they are not" and their equities are being traded, e.g. `OTCMKTS: HMNY`. Usually, theses companies are destined to `takeover`, `involuntary M&As`, and so. Also, there are types of bankruptcies that you might take into account, not to mention the complexity of U.S. bankruptcy courts, when it comes to public firms Wikipedia. Majorities of top public companies are incorporated in Delaware, which has a fairly advanced court system to protect shareholders (e.g., Delaware Court of Chancery). Companies in pharmaceutical sector might be good to look into since they usually develop high-risk products that may not succeed. You may use `stock screener` tools to filter companies based on any criteria you wish and find those that are in serious financial situations. In fact, many small-account retail traders love to trade their equities, since they are usually `oversold` Finviz Oversold TradingView. My favorites `screeners` are: Finviz TradingView Also, you may collect grading data from so many equity research websites Wikipedia. Such as: Seeking Alpha Zacks.com Barron's Thomson Reuters GE on Finviz GE chart on TradingView ## Answer by Dimitri Vulis (score 10) https://quant.stackexchange.com/a/44147 Since the stock is listed on NASDAQ, you have access to fairly standard 10Q and 10K financial statements. So you can apply the analysis pioneered by Ed Altman in his Z-score paper - compare this company's fundamental ratios with those of other companies, and see how many of them went bankrupt historically. For example, Moody's KMV uses this approach to estimate "EDF" (expected default frequency) for many corporate credits.
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