Analyzing The Bankruptcy Risk For GoPro Inc

  • GoPro has a healthy Altman Z score of 4.75.
  • Bankruptcy risk is quite low as the Z score is healthy, and falls in the safe zone.
  • Hero 5 sales could further reduce its bankruptcy risk.

GoPro (NASDAQ:GPRO) has been the subject of numerous speculative discussions lately. The company has witnessed a significant decline in sales over the past 12 months as its Hero 4 session failed to impress consumers and technology enthusiasts alike. This, coupled with the camera-maker’s decision to slash 7% of its workforce earlier this year, and its rival filing for bankruptcy last month, sparked speculative debates about the likelihood of GoPro’s bankruptcy across a few investment forums. So, in this article, let’s evaluate GoPro’s financial stress levels to have a better sense of understanding about the camera maker’s financial future.

The magic formula

We’ll be using the Altman Z score to evaluate GoPro’s financial position in this article. The formula has been around for almost five decades now and has been applied across several industries and verticals to predict the probability of a publicly traded firm going bankrupt. The methodology is relevant in today’s time, and we still see the formula being used to evaluate public firms every now and then.

Also read: Is GoPro A Good Turnaround Bet?

The Z score is basically a credit strength indicator. It requires the calculation of 5 specific business ratios, where each of the ratios has been allocated a separate weightage. These weightages weren’t derived from a mathematical formula, but rather found by Edward Altman, after studying the financials of a vast pool of publicly traded corporations that filed for bankruptcy. So it’s like finding a common pattern amongst bankrupt firms, and seeing if any of the publicly traded companies exhibit the pattern in today’s time.

The Altman Z Score formula goes as follows:

Z = 1.2 T1 + 1.4 T2 + 3.3 T3 + 0.6 T4 + 0.999 T5

Here T(x) variables are different business ratios and their prefixed coefficients are the weightages. Each T(x) is different from the other, calculated using a separate formula and holds a different meaning. They are:

  • T1 = Working Capital / Total Assets
  • T2 = Retained Earnings / Total Assets
  • T3 = Earnings Before Interest & Taxes / Total Assets
  • T4 = Total Market Value of Equity / Book Value of Total Liabilities
  • T5 = Sales / Total Assets

There are three zones that the Z score can fall under; they are the Safe Zone, Grey Zone and the Distressed Zone. For example, if the Z score of a company is greater than 2.99, the firm is considered to be in the safe zone with no imminent threat of bankruptcy. Similarly, a Z score of below 1.8 indicates that the firm is financially distressed and that there’s a high probability of it heading for bankruptcy if its financials don’t improve soon. For the sake of simplicity, the 3 zones of the Altman Score have been briefed below:

Companies with Z Score > 2.99 are in the Safe Zone

Companies with 1.81 < Z Score < 2.99 are in the Grey Zone

Companies with Z Score < 1.81 are in the Distressed Zone

But I’d like to emphasize the fact that Z score is an indicator, not an absolute predictor of bankruptcy.

Applying the formula

The first thing that we need to do is, extract relevant financial information. We can’t calculate the Z score if we don’t have GoPro’s financials. So I went over to GoPro’s last four 10Q filings to find trailing twelve month figures for EBIT and Sales, while other metrics such as Working Capital, Total Assets, Total Liabilities, Book Value of Total Liabilities were taken from the last 10Q alone. The figures are as follows:

GoPro Financials
Working Capital $245.80
Retained Earnings ($54.89)
Total Assets $864.38
EBIT (TTM) ($244)
Total Market Value of Equity $1,780
BV of Total Liabilities $266.99
Sales (TTM) $1,241

(GoPro’s 10Q Filings, YCharts)

Now that we have GoPro’s financials, we simply have to input these numbers to calculate the T(x) business ratios, attach the above mentioned coefficients to them, and arrive at the final Z score. Here’s what the work-up from my Excel sheet looks like:

Screen Shot 2016-08-08 at 2.23.58 PM

(Source: Author Calculations)

So there we have it: GoPro’s Z score stands at roughly about 4.75, the company falls under the Safe Zone with that score, showing no particular sign of financial stress. The score is far above the 2.99 threshold of the Safe Zone. Let me remind readers that score-based classification of companies into zones was discussed earlier in the article, so we don’t have to cover that part all over again.

Making sense of the data

A healthy Z score of 4.75 indicates that the GoPro isn’t a financially distressed firm, at least not yet. It would have been a cause of concern had the score been below 1.8, but that’s clearly not the case here. The company has ample cushioning before its Z score breaches the 1.81 threshold of distressed zone. So, for now, shareholders should be more concerned about GoPro’s growth rate, than its likelihood of bankruptcy.

It’s worth noting that GoPro will be launching its new line of Hero 5 cameras this year. A healthy sales contribution from sales of its latest camera line-up would not only boost revenue but also lift its market capitalization higher. Since both these metrics have a role to play in the score calculation, an improvement in these figures might as well lift GoPro’s Altman score higher. So we have to keep an eye on Hero 5 sales.

Screen Shot 2016-08-08 at 8.45.51 PM


In fact, analyst consensus reveals that GoPro’s revenue and EBITDA figures are expected to surge over the next 2 years; these figures include GoPro’s drone-related sales projections. The chart attached above highlights that the camera maker’s financials would significantly improve going forward. Therefore, it's possible that we could be looking at GoPro’s financial position improving over time, not deteriorating. In such a situation, there shouldn’t be any material cause of concern relating to the camera maker’s risk of bankruptcy.

Piyush Arora Piyush Arora   on Amigobulls :
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  • I do not have any business relationship with the companies mentioned in this post.
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