Ohlson O-Score IndicatorThe Ohlson O-Score is a financial metric developed by Olof Ohlson to predict the probability of a company experiencing financial distress. It is widely used by investors and analysts as a key tool for financial analysis.
Inputs:
Period: Select the financial period for analysis, either "FY" (Fiscal Year) or "FQ" (Fiscal Quarter).
Country: Specify the country for Gross Net Product data. This helps in tailoring the analysis to specific economic conditions.
Gross Net Product : Define the number of years back for the index to be set at 100. This parameter provides a historical context for the analysis.
Table Display : Customize the display of various tables to suit your preference and analytical needs.
Key Features:
Predictive Power : The Ohlson O-Score is renowned for its predictive power in assessing the financial health of a company. It incorporates multiple financial ratios and indicators to provide a comprehensive view.
Financial Distress Prediction : Use the O-Score to gauge the likelihood of a company facing financial distress in the future. It's a valuable tool for risk assessment.
Country-Specific Analysis : Tailor the analysis to the economic conditions of a specific country, ensuring a more accurate evaluation of financial health.
Historical Context : Set the Gross Net Product index at a specific historical point, allowing for a deeper understanding of how a company's financial health has evolved over time.
How to Use:
Select Period : Choose either Fiscal Year or Fiscal Quarter based on your preference.
Specify Country : Input the country for country-specific Gross Net Product data.
Set Historical Context : Determine the number of years back for the index to be set at 100, providing historical context to your analysis.
Custom Table Display : Personalize the display of various tables to focus on the metrics that matter most to you.
Calculation and component description
Here is the description of O-score components as found in orginal Ohlson publication :
1. SIZE = log(total assets/GNP price-level index). The index assumes a base value of 100 for 1968. Total assets are as reported in dollars. The index year is as of the year prior to the year of the balance sheet date. The procedure assures a real-time implementation of the model. The log transform has an important implication. Suppose two firms, A and B, have a balance sheet date in the same year, then the sign of PA - Pe is independent of the price-level index. (This will not follow unless the log transform is applied.) The latter is, of course, a desirable property.
2. TLTA = Total liabilities divided by total assets.
3. WCTA = Working capital divided by total assets.
4. CLCA = Current liabilities divided by current assets.
5. OENEG = One if total liabilities exceeds total assets, zero otherwise.
6. NITA = Net income divided by total assets.
7. FUTL = Funds provided by operations divided by total liabilities
8. INTWO = One if net income was negative for the last two years, zero otherwise.
9. CHIN = (NI, - NI,-1)/(| NIL + (NI-|), where NI, is net income for the most recent period. The denominator acts as a level indicator. The variable is thus intended to measure change in net income. (The measure appears to be due to McKibben ).
Interpretation
The foundational model for the O-Score evolved from an extensive study encompassing over 2000 companies, a notable leap from its predecessor, the Altman Z-Score, which examined a mere 66 companies. In direct comparison, the O-Score demonstrates significantly heightened accuracy in predicting bankruptcy within a 2-year horizon.
While the original Z-Score boasted an estimated accuracy of over 70%, later iterations reached impressive levels of 90%. Remarkably, the O-Score surpasses even these high benchmarks in accuracy.
It's essential to acknowledge that no mathematical model achieves 100% accuracy. While the O-Score excels in forecasting bankruptcy or solvency, its precision can be influenced by factors both internal and external to the formula.
For the O-Score, any results exceeding 0.5 indicate a heightened likelihood of the firm defaulting within two years. The O-Score stands as a robust tool in financial analysis, offering nuanced insights into a company's financial stability with a remarkable degree of accuracy.
Bankruptcy
BearMetricsLooking at the financial health of a company is a critical aspect of stock analysis because it provides essential insights into the company's ability to generate profits, meet its financial obligations, and sustain its operations over the long term. Here are several reasons why assessing a company's financial health is important when evaluating a stock:
1. **Profitability and Earnings Growth**: A company's financial statements, particularly the income statement, provide information about its profitability. Analyzing earnings and revenue trends over time can help you assess whether the company is growing or declining. Investors generally prefer companies that show consistent earnings growth.
2. **Risk Assessment**: Financial statements, including the balance sheet and income statement, offer a comprehensive view of a company's assets, liabilities, and equity. By evaluating these components, you can gauge the level of financial risk associated with the stock. A healthy balance sheet typically includes a manageable debt load and strong equity.
3. **Cash Flow Analysis**: Cash flow statements reveal how effectively a company manages its cash, which is crucial for day-to-day operations, debt servicing, and future investments. Positive cash flow is essential for a company's stability and growth prospects.
4. **Debt Levels**: Examining a company's debt levels and debt-to-equity ratio can help you determine its leverage. High debt levels can be a cause for concern, as they may indicate that the company is at risk of financial distress, especially if it struggles to meet interest payments.
5. **Liquidity**: Liquidity is vital for a company's short-term survival. By assessing a company's current assets and current liabilities, you can gauge its ability to meet its short-term obligations. Companies with low liquidity may face difficulties during economic downturns or unexpected financial challenges.
6. **Dividend Sustainability**: If you're an income-oriented investor interested in dividend-paying stocks, you'll want to ensure that the company can sustain its dividend payments. A healthy balance sheet and consistent cash flow can provide confidence in dividend sustainability.
7. **Investment Confidence**: A company with a strong financial position is more likely to attract investor confidence and positive sentiment. This can lead to higher stock prices and a lower cost of capital for the company, which can be beneficial for its growth initiatives.
8. **Risk Mitigation**: By assessing a company's financial health, you can mitigate investment risk. Understanding a company's financial position allows you to make more informed decisions about the level of risk you are comfortable with and whether a particular stock aligns with your risk tolerance.
9. **Long-Term Viability**: Ultimately, investors are interested in companies that have the potential for long-term success. A company with a healthy financial foundation is more likely to weather economic downturns, adapt to industry changes, and thrive over the years.
In summary, examining a company's financial health is a fundamental aspect of stock analysis because it provides a comprehensive picture of the company's current state and its ability to navigate future challenges and capitalize on opportunities. It helps investors make informed decisions and assess the long-term prospects of a stock in their portfolio.
