Use the Altman Z-Score to Check the Financial Quality of your Stocks

Edward Altman invented the Altman Z-Score in the 1960’s to determine the statistical probability of a company going bankrupt. The has a nice interactive Z-score calculator that allows you to type in eight variables to determine the likelihood of failure. According to the site, a score under 1.80 means “Probability of Financial embarrassment is very high.”

I tried it for Valeant Pharmaceuticals (VRX) and came up with a score of -45.33 [That’s MINUS 45.33]. The text result says “Probability of Financial Embarrassment is very high in this case.”

In order for a company to rank safe based on the data entered, it needs a score above 3. A score of 2.70 to 2.99 means the company is on alert, and a score of 1.80 to 2.70 means that there is a good chance of the company going bankrupt within a couple years.