Z-Score

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.

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 number of income statement and balance sheet values that measures the financial health of a company.

In a series of tests covering three different time periods over 31 years (up until 1999), the 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

 

The Altman Z-Score in the screener

You can easily use the Altman Z-Score in any of your favourite screens.

Simply select 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).

altman z score