Real estate, alternative real assets and other diversions

Could Purplebricks go bust? Apparently not, says analyst

Residential Investor

An analyst on shares website Motley Fool says Purplebricks is not only in surprisingly strong financial health, but is actually outperforming some longer established bricks-and-mortar agencies.

The Motley Fool analyst in question, Karl Loomes, says his favourite metric for looking at company health is called the Altman Z-Score – a test based on five key financial ratios.

The result is then compared to the average for the sector. Loomes believes a score of 3.0 is adequate and any higher score shows the company is relatively strong. 

So Loomes has calculated the Z-Score for Purplebricks and compared it to two other sector players quoted on the London Stock Exchange – Foxtons Group and Hunters Property. 

The estate agency sector average of Purplebricks, Hunters and Foxtons combined, looked at across all five metrics. was 5.36.

But Purplebricks by itself (to Loomes’ own surprise, it seems) comes out at a strong 9.81. 

Specifically on metric one (working capital) Purplebricks has 0.83 while the sector average is 0.32; on metric two (retained earnings) Purplebricks flunks with a negative score of -0.17 while the sector normal is 0.22.

On earnings before interest and taxes – this is metric three – Purplebricks also flunks, with -0.15 against the sector average of -0.06. But on metric four (the market value of equity) Purplebricks soars with 15.01 against the sector average of 6.92. 

On the fifth and final metric (revenue) Purplebricks is roughly on the sector average with a score of 0.54 against the whole-sector score of 0.72. 

“Needless to say, these results are somewhat surprising – Purplebricks shows a healthy 9.81, even beating the industry average” says Loomes.

But he says his own analysis should be treated with caution for a number of reasons. 

Firstly, the financial report for Purplebricks was for the year ending April 2018 (its latest full year report) and we all know the company has had difficulties since then. 

Secondly, says Loomes: “”When assessing the company against its peers, in some ways it is too unique for an accurate comparison. Traditional estate agents could arguably have a different business model that makes a like-for-like evaluation somewhat skewed.”

And Loomes also concedes that such a large amount of Purplebricks’ positive score comes from the market value of its equity. 

“Even at current share prices, the large number of shares it has in issue is helping to firm up its numbers. Needless to say this is not necessarily the strongest of foundations to keep a company afloat” he notes.

But Loomes believes that Purplebricks’ recent decision to scrap its Australian service and review its US offer mean that it is likely to reduce assets and liabilities. “With these figures, Purplebricks’ Z-Score is still likely to hold above the crucial 3 level” he says.

Loomes accepts that idiosyncrasies of the metrics used by the Z-score but insists that despite all that, “perhaps Purplebricks’ prospects are not quite as dire, for now, as we all may have thought.”






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