The Altman Z-score formula for predicting bankruptcy was published in 1968 by Edward I. Altman when he was an Assistant Professor of Finance at New York University.
You can use the Z-Score to predict the probability that a company will go into bankruptcy within the next two years. The Z-Score is calculated using a company's financial income statement and balance sheet to measure the financial health of a company.
In a series of tests covering three different time periods over 31 years (up until 1999), the Z-Score model was found to be 80-90% accurate in predicting bankruptcy one year prior to the event, with an error rate of 15-20%.
The z-score is calculated as follows:
Z-score = 1.2T1 + 1.4T2 + 3.3T3 + .6T4 + .999T5.
T1 = Working Capital / Total Assets.
T2 = Retained Earnings / Total Assets.
T3 = Earnings Before Interest and Taxes / Total Assets.
T4 = Market Value of Equity / Book Value of Total Liabilities.
T5 = Sales/ Total Assets.
And is interpreted as follows:
Z-score > 2.99 = Safe
1.8 < Z-score < 2.99 = Middle or grey
Z-score < 1.80 = Distress
How to use the ratio
Available as a screening ratio: No
Available as an output column ratio: Yes
The Altman Z-Score in the stock screener
You can easily use the Altman Z-Score in any of your stock screens.
Simply add Altman Z-Score as one of the output columns of your screen. You can then use the filter function (click the funnel icon) to screen out companies with a bad Z-Score of less than 1.80.
You can see in the screenshot below that the z-Score values are colour coded so you can easily see what is good (green), middle is (black) and distress (red).
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