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
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 Assetsmeasures the liquidity of the company's assets with respect to the size of the company
Retained Earnings / Total Assetsis used as an indicator of past profitability, company age, and profit potential
Earnings Before Interest and Taxes / Total Assetsmeasures the current profitability and asset efficiency of the company
Market Capitalization / Total Liabilitiesmeasures 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 Assetsadditional 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.
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:
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:
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:
Once the screen returns the relevant matches, you can either research the individual names further or create a portfolio based on the results.
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