In this article, Manward Press Founder Andy Snyder looks at the Altman Z-Score. It’s a little-known but very powerful indicator formula that helps investors identify companies that are at high risk for bankruptcy.

When it comes to investing, there aren’t many things worse than the “B” word. Of course, we’re talking about bankruptcy. The last thing we want to do when we’re investing is invest in a company that goes bankrupt. Our equity stake goes to zero. That’s bad.

So how do you avoid it? During the coronavirus pandemic, unemployment rates have been higher than we’ve seen since the Great Depression. Gold’s Gym filed for bankruptcy. JC Penney, Whiting Petroleum and J. Crew are also on the list.

I like to look at an indicator that’s been around since 1967 called the Altman Z-Score. It was created by Edward Altman, and it’s just five different things that we look at. Five fundamental ratios that show you how a company is doing financially.

The Altman Z-Score Formula

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

So by looking at things like profitability, leverage and liquidity, we come away with a single-digit number. That magic number is 1.8 historically. Anything below that 1.8 level means a company is at a very high risk for bankruptcy. Anything above 3 is considered very strong.
Going into 2007, Altman ran the score and calculated that the median score for the entire S&P 500 was around 1.81… that’s trouble. He was one of the first to predict a big financial debt crisis. Based on the indicators he was watching, he knew that some sort of debt crisis was going to come.

So right now, depending on the metrics you use and the exact numbers, the S&P 500 itself is at about 2.17 – 2.2. We’re certainly nowhere near that 3, and we are coming down toward that 1.8. So there’s some trouble there… we’re in the gray space.

But I’m sure you’re looking for companies that are below that 1.8. I picked five of them. Some of them are household names. Hopefully you don’t own any of these, but if you do, it’s not necessarily bad. I’ll tell you why in a second.

5 Companies with Low Altman Z-Scores

Eastman Kodak Company (NYSE: KODK)
Altman Z-Score: .99

It’s no surprise that a historic name like Kodak is having some problems. Even before this coronavirus mess, the company was having trouble keeping up in the digital age.

Uber Technologies Inc (NYSE: UBER)
Altman Z-Score: .97

You might not be surprised to hear that Uber has a score of .97. That’s because it has $17 billion in debt and $4.7 billion in negative free cash flow each year. That’s a problem. A lot of debt and cash going out the door. So it’s in need of financing and the coronavirus has only made it worse.

3D Systems Corporation (NYSE: DDD)
Altman Z-Score: .97

This is one of my favorite stocks. 3D Systems’ numbers are a little bit better. It has $24 million in positive cash flow, but it does have about $300 million in debt. So it has some issues. It’s been a pretty hot stock during the coronavirus, so just because it’s on this list doesn’t mean you have to sell it.

YRC Worldwide Inc (NASDAQ: YRCW)

Altman Z-Score: .92

YRC Worldwide is a big trucking company. You’ve probably seen its trucks. After 2008 it had some issues. It was a company I was writing about way back then. Its score is .92 and it has $120 million in negative cash flow.

Timkensteel Corp (NYSE: TMST)

Altman Z-Score: .74

Timkensteel had some problems going into the Covid-19 pandemic. Nobody’s building right now, but here’s the thing with that… if we start to see stimulus spending and greater infrastructure spending, steel could be really big.

Remember, with all five of these companies, just because they’re on the bankruptcy watch list does not mean they are going bankrupt. 3D Systems is a company I’m recommending and I think it’s a strong play. I think it pulls out of this bankruptcy and as its Altman Z-Score rises, it could be good.

So, just because these companies are on our bankruptcy watch list, doesn’t necessarily mean they’re bad investments. Let’s look at the inverse. Any company with an Altman Z-Score above 3 may offer investors a good opportunity.

How Do Investors Use The Altman Z-Score?

Most brokerage platforms allow you to use the Altman Z-Score as part of your subscription. You should be able to find some good stock screeners to assist you in your research.

There are certainly plenty of opportunities out there. By using this formula you can hopefully avoid the companies that are on the cusp of bankruptcy and keep those big zeros out of your portfolio.

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