Predicting Bankruptcy w/ Altman Z-Score
With 70 significant companies filing for bankruptcy in 2023, it’s hard to imagine smooth sailing is on the horizon. However, with a number like that, there’s a way to avoid investing in companies struggling post-pandemic. The Altman Z-Score spots companies heading for bankruptcy.
Although there is no perfect metric, it’s better to be safe than sorry when you’re investing in volatile times. The Altman Z-Score evaluates the financial health of companies but with the twist of looking for the bad. Let’s dive into why the worst screener can help you make the best decisions!
What is the Altman Z-Score?
Although typically, you want to find the companies that are doing amazing, if you find the ones that aren’t performing well, they can help you maintain a strong portfolio.
What is the Altman-Z score? It is a score specific for the manufacturing space, to let you know if a company is likely to file for bankruptcy.
How is it calculated? Altman Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E
- A = working capital / total assets
- B = retained earnings / total assets
- C = earnings before interest and tax / total assets
- D = market value of equity / total liabilities
- E = sales / total assets
Generally, the consensus is if a company’s Altman Z-Score is below 1.8, it is headed for bankruptcy, but a score above 3 is promising that it will not head toward bankruptcy. It isn’t meant to evaluate a company’s potential growth, only its downturn, so a “good Z-score” doesn’t automatically mean a company is growing or moving in a positive direction.
What is its value? If you can predict a company’s bankruptcy, you can avoid a potential downturn. The ratio lets you peer into a company’s financial health by evaluating if it’s in a poor spot.
How can you use it? You can use and test your current investments to see their financial health or test for companies on the downturn. Using Equities Lab, under the watchlist section, you can add them to a blacklist so you don’t ever accidentally invest.
Backtesting for Altman-Z
With Equities Lab, users can incorporate important financial metrics to determine green flags (or red flags) for particular strategies and companies.
The following screener will have a niche focus, the Altman Z Score Yearly input, with a less than or equal to 1.8. The score is most useful in manufacturing, so the screener will classify specifically for the Manufacturing – Apparel & Accessories industry.
The graph below will display a 23-year period to evaluate the lack of success. The irony of trying to find the force-performing screener will, at some point, come in handy, and boy, are these bad backtesting results. Not only are they terrible, but it only goes down further and further from 2000-2023.
The results report below didn’t fair any better (but that’s good in this case)! With a total returns of -99.85%, a drawdown of 99, and annualized returns low enough to give a heart attack, it’s obvious this screener is TERRIBLE. Thankfully, that perfectly fits our goal.
Altman Z-Score with Current Companies
The kicker isn’t how badly companies performed in the past but who is currently performing poorly at their worst or enough to fit the criteria.
Instead of backtesting, hit go in Equities Lab; three companies currently meet the criteria for the Altman Z-Score in the Manufacturing – Accessories & Apparel industry. They are VF (VFC), HanesBrands (HBI), and Wolverine World Wide (WWW). Below are the financial metrics for each company.
| Financial Metrics | VFC | HBI | WWW |
| Closing Price | 17.72 | 4.55 | 8.3 |
| 52-Week Range | 16.77 — 42.04 | 3.85 — 8.975 | 7.9 — 19.43 |
| Market Cap | 7.684b | 1.837b | 642.48m |
| Volume / Avg. 30 days | 7.61m / 6.499m | 6.518m / 6.564m | 1.242m |
| P/E | 65.61 | ? | ? |
| Dividend / Yield | 1.81 / 0.0779 | 0.6 / 0.0638 | 0.4 / 0.0481 |
| EPS T12M | 0.3 | -1.12 | -3.569 |
| Piotroski F-Score T12M | 2 | 2 | 3 |
| Beta | 1.51 | 1.17 | 1.408 |
| Green Flags | None | None | None |
| Red Flags | Low F-Score, price a third of all time high | Twenty-day drop, low F-Score, price a third of all-time high | Twenty-day drop, price a third of all-time high |
What do the metrics indicate? It is clear from their F-Scores that they aren’t healthy companies. The P/E is either unknown or incredibly high, indicating the EPS is a red flag, and if you look at it, then you can see that it is; there are no green flags, only red flags.
Clearly, something is wrong with these companies, indicating they aren’t worth investing in, so the Altman Z-Score worked.
Takeaways
What’s next? Unless you’ve got the superpower to see into the future and revive these companies, or your whole gig is investing in vulnerable companies, blacklist everything above.
The best way to protect yourself financially is to determine what is good and NOT good to invest in. Unfortunately, the above companies are the latter choice, but now you have the tools to determine the downturn of companies that are not worth it. Happy investing!
