How investors can use these tools

• Our Screener: To screen for low-scoring stocks as potential candidates for selling short.
• Our Calculator: To check current long holdings for early warning signs of financial distress.

More on the accuracy of the Altman Z-Score Model

In its initial test, the Altman Z-Score was found to be 72% accurate in predicting bankruptcy two years prior to the event, with a Type II error (predicting bankruptcy for a firm when the firm does not go bankrupt) of 6%. In a series of subsequent tests covering three different time periods over the next 31 years (up until 1999), the model was found to be approximately 80-90% accurate in predicting bankruptcy one year prior to the event, with a Type II error of approximately 15-20%.

X 3

= earnings before interest and taxes/total assets

X 4

X 5

= sales/total assets

Because each model has a different threshold score to indicate distress, in order to combine the results of our screening of manufacturing and non-manufacturing, non-financial stocks into one ranking list, we rank each company by its distance from its respective threshold, with distance below either threshold represented by a negative sign. So, for example, a manufacturing company with a Z-Score of 1.8 would have a distance from its distress threshold of -.01, while a non-manufacturing company with a Z”-Score of 1.8 would have a distance from its distress threshold of .7. The smaller (or more negative) the number, the more distressed the company is, according to the model used. The goal is for the combined list to represent the most distressed companies in our universe, regardless of whether they are manufacturing or non-manufacturing companies.

Our universe of stocks

Our universe consists of approximately three thousand publicly-traded companies sorted by Standard Industrial Classification (SIC) codes into manufacturing and non-manufacturing stocks. This universe includes stocks that traded on the NYSE, AMEX, NASDAQ, OTC Bulletin Board, and the Pink Sheets, that had an average volume of 50,000 shares or more traded over the previous three months, and had a share price greater or equal to $0.25 for stocks on the first four markets. A daily traded value of $30,000 or greater was used instead of the minimum share price criterion for stocks on the Pink Sheets. Our universe excludes ADRs and other companies that haven’t filed financial statements in the U.S. in the last four quarters. Our universe also excludes financial stocks, since the Altman models (and other models that rely on financial statement data) are generally not recommended for financial companies. This is because of the opacity of financial companies’ financial statements and their frequent off-balance sheet items.