Tobin’s Q valuation ratio, for example, is at 0.03. That means that the GM stock valuation (about $12 billion) is just about 3 pct of what it would cost to replace the existing assets. If the Tobin’s Q ratio is less than 1.0, there is an implication that the stock is undervalued.
But that’s based on a going concern, which in the case of GM is debatable. We all know GM is in financial trouble.
The best predictor of insolvency or even bankruptcy is an financial measurement called the Altman’s Financial Structure Z-Score Ratio. If the Z-Score is equal to or better than 3.0, then the Company is likely to be financially sound. Below 1.81, it’s in trouble or headed that way. GM’s financial trouble is confirmed by its present Z-Score of 1.08.
Altman's Z-Score and Tobin's Q-Ratio can be found at the ADVFN Financials service for all U.S. listed industrial companies. I refer to them often.
Tuesday, March 28, 2006
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