NBP earns an exceptional Z-score
Is New Berlin Plastics a safe place to put your injection molding work? Of course! But don’t take our word for it. Let the numbers speak for themselves:
Our Z-score of 5, recently calculated as part of a risk assessment for a major OEM customer, indicates that NBP is exceptionally financially stable. This popular formula takes into account profitability, leverage, liquidity, solvency, and activity ratios.
The Altman Z-score was published in 1968 by Edward I. Altman, an Assistant Professor of Finance at New York University. He devised it to predict the amount of financial distress a company is facing – specifically, the likelihood that it will go bankrupt during the next two years. In the 50+ years since it was developed, the Z-score has proved to be 75% to 85% accurate in predicting financial outcomes.
The calculation of a Z-score involves ratios like working capital/total assets, retained earnings/total assets, and EBIT/total assets. They measure parameters like the level of liquid assets, profitability, and operating efficiency.
What do Z-scores mean?
“If a Z-score is less than 1.8, that’s an indication of a company in financial distress,” explains New Berlin Plastics CFO Joy Hertlein. “Between 1.8 and 3.0 is a caution zone. Any company with a score of 3.0 or above is considered to have very little risk of instability. Our Z-score of 5.0 indicates that we have a very strong balance sheet and we’re not at risk of financial problems,” she adds.
Hertlein believes the Z-score is a valuable tool because it doesn’t just look at one part of the business, such as the balance sheet or profit and loss statement. “It examines multiple areas of the business, pulling that together into a formula and calculating an overall risk score,” she reveals.
Why is the Z-score important today?
In today’s turbulent marketplace, suppliers can get into financial trouble quickly, making a formula like the Z-score a critical tool for assessing the stability of suppliers. Most of the metrics OEMs use to measure supplier performance such as on-time delivery, part quality, and annual sales, are lagging indicators. In other words, they point to past performance and are often only updated once a year.
“That’s an eternity in today’s fast-changing environment,” Hertlein emphasizes. “The Z-score is more of a real-time barometer of supplier health.”
Just because a supplier showed strong performance last year doesn’t mean it’s financially healthy now, she cautions. If a company has low working capital or is carrying a lot of debt, it may not have enough money to pay its bills. That may also limit its ability to obtain a line of credit to buy material to produce parts for its customers.
“Either one of these issues – low working capital or high debt – can easily turn into a downward spiral,” she adds.
The bottom line: resilience
During unpredictable times, a molder’s best bet is to cultivate resilience – the ability to weather unexpected challenges while continuing to provide its customers with high-quality parts on a timely basis.
New Berlin Plastics’ continuing investments in people, process, and technology have enabled it to do just that, making it a safe place for OEMs to put their part production.
“We have an experienced leadership team and a strong strategic process. We’re always looking for potential bottlenecks and areas of strategic risk, and we work proactively to solve them,” Hertlein emphasizes.
Examples include investments in new presses, robots and automation, additional quality control equipment, hiring top-notch people who can help move the business forward, and NBP’s recent announcement of its expansion into a new building.
New Berlin Plastics’ high Z-score is a strong validation of its focused, conservative approach. That’s especially important because the economy doesn’t appear to be stabilizing any time soon.
“Fifty percent of economists predict we’re going to have a recession either later this year or next year. Whatever comes next, we’re ready for it,” Hertlein concludes.