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Stock Screen: Strong Altman Z-Score

Stock Screen: Strong Altman Z-Score

. 3 min read

Strong Altman Z-Scores

The goal of this screen is to find stocks with strong Altman Z-scores (credit risk indicator), positive cash flow, and increasing profits.

You can view the latest results here: Screen: Strong Altman Z-Scores

About the Altman Z-Score

The Altman Z-Score estimates the risk of bankruptcy within the next two years for a company. The methodology to calculate a Altman Z-Score is based on research published by Edward Altman in 1968. Edward Altman is a renowned Finance professor at NYU's Stern School of Business. A company's Z-Score is calculated using metrics derived from its Income Statement and Balance Sheet.

The formula can be summarized as follows:

Altman Z-Score =
       1.2  x  Working Capital / Total Assets
  (+)  1.4  x  Retained Earnings / Total Assets
  (+)  3.3  x  Earnings Before Interest and Taxes / Total Assets
  (+)  0.6  x  Market Capitalization / Total Liabilities
  (+)  1.0  x  Total Revenue / Total Assets
  • Working Capital / Total Assets measures the liquidity of the company's assets
    with respect to the size of the company
  • Retained Earnings / Total Assets is used as an indicator of past
    profitability, company age, and profit potential
  • Earnings Before Interest and Taxes / Total Assets measures the current
    profitability and asset efficiency of the company
  • Market Capitalization / Total Liabilities measures the amount of leverage
    based on the company's future profit potential and the value ascribed to its equity
    in the current economic environment
  • Total Revenue / Total Assets additional measure of current
    profitability and asset efficiency

Interpreting the Altman Z-Score

A company is considered to be in the Safe Zone if it scores greater than 2.99. If a company scores between 1.81 and 2.99, it's considered to be in the Gray Zone while a score below 1.81 is considered Distress Zone.

Filters

In this section, I'll summarize key filters used in the default Strong Altman Z-Scores screen:

  • Altman Z-Score > 3
  • Levered Free Cash Flow > $0 million
  • EBIT Growth > 0

Filter 1: Altman Z-Score

finbox.io makes it easy to find stocks that have strong Altman Z-Scores. You simply need to add the Altman Z-Score filter:

Altman Z-Score Filter

Filter 2: Levered Free Cash Flow

Levered Free Cash Flow (LFCF) represents a company's cash flows after interest payments on outstanding debt. These cash flows are typically retained by the company or distributed to shareholders in the form of dividends. I wanted to exclude companies with negative LFCF so I added the following criteria:

Levered Free Cash Flow Filter

Filter 3: EBIT Growth

EBIT is a common measure of profitability and stands of Earnings before Interest and Taxes. I wanted to exclude any companies with declining profitability:

EBIT Growth Filter

Downloading Results

Once the screen returns the relevant matches, you can either research the individual names further or create a portfolio based on the results.

To add any match to your Watchlist, just click the icon:

Add Watchlist

You can also Save the screen run again at a later time or Download all the matching results:

Download Save

Sources / Additional Reading


Andy Pai

Founder @ finbox.io. We build tools that make life easier for investors. I started my career in investment banking. I live in Chicago. Reach out if I can be helpful!

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