Altman Z-Score & Piotroski F-Score
Learn how to use the Altman Z-Score to assess bankruptcy risk and the Piotroski F-Score to evaluate financial strength — and how Diplyzer computes these scores instantly for any company.
Learn how to use the Altman Z-Score to assess bankruptcy risk and the Piotroski F-Score to evaluate financial strength — and how Diplyzer computes these scores instantly for any company.
Analyzing individual financial ratios is valuable, but sometimes you need a single, comprehensive verdict: is this company financially strong or financially fragile? That's the purpose of composite financial health scoring systems.
Two models stand above the rest: the Altman Z-Score for bankruptcy risk, and the Piotroski F-Score for financial quality. Together, they give you a rapid, multi-dimensional assessment of any public company's financial condition.
The Altman Z-Score was developed in 1968 by NYU finance professor Edward Altman. It combines five financial ratios into a single score that predicts the probability of corporate bankruptcy within the next two years with remarkable accuracy.
Originally developed for public manufacturing companies, adapted versions now cover non-manufacturing, private, and emerging market companies.
Z = 1.2(X1) + 1.4(X2) + 3.3(X3) + 0.6(X4) + 1.0(X5)
Where:
| Z-Score Range | Zone | Interpretation |
|---|---|---|
| Above 3.0 | Safe Zone | Low bankruptcy risk; financially healthy |
| 1.81 – 3.0 | Grey Zone | Elevated uncertainty; monitor closely |
| Below 1.81 | Distress Zone | High bankruptcy risk; serious concern |
Working Capital / Total Assets (X1): Measures short-term liquidity. Companies with sufficient current assets to cover current liabilities score well here.
Retained Earnings / Total Assets (X2): Measures cumulative profitability and leverage. Companies that have consistently retained earnings (rather than distributing all profits) build a financial buffer.
EBIT / Total Assets (X3): The most important component — measures core operational profitability relative to asset base. Companies generating strong EBIT from their assets are fundamentally sound.
Market Cap / Total Liabilities (X4): The market's implicit assessment of the company's ability to cover its debts. When market cap is large relative to liabilities, the market is expressing confidence.
Revenue / Total Assets (X5): Asset efficiency — how effectively the company uses its asset base to generate sales.
Ask Diplyzer:
"What is [company]'s Altman Z-Score? Which zone is it in — safe, grey, or distress? Which of the five components is contributing most to the score?"
Value investors frequently use the Z-Score to screen out financially distressed companies from their value screens. A cheap stock with a Z-Score below 1.81 may be cheap for good reason — it may be heading toward financial distress.
Use case: Filtering an insider buying list:
"From the list of insider purchases over $1M in the last 30 days, which companies have an Altman Z-Score above 2.5? I want to filter out financially distressed situations."
The Piotroski F-Score was developed in 2000 by Stanford accounting professor Joseph Piotroski. It scores a company on nine binary criteria (each worth 0 or 1 point) across three dimensions: profitability, leverage/liquidity, and operating efficiency. The total score ranges from 0 to 9.
Profitability (4 points)
| Criterion | Score 1 If... |
|---|---|
| Return on Assets (ROA) | Positive this year |
| Operating Cash Flow | Positive this year |
| Change in ROA | ROA improved vs. last year |
| Accruals | OCF / Total Assets > ROA (earnings quality signal) |
Leverage, Liquidity & Source of Funds (3 points)
| Criterion | Score 1 If... |
|---|---|
| Change in Leverage | Long-term debt ratio decreased |
| Change in Current Ratio | Current ratio improved |
| Share Issuance | No new shares issued (not diluting existing holders) |
Operating Efficiency (2 points)
| Criterion | Score 1 If... |
|---|---|
| Change in Gross Margin | Gross margin improved vs. last year |
| Change in Asset Turnover | Asset turnover ratio improved vs. last year |
| Score | Financial Quality |
|---|---|
| 7 – 9 | Strong financial quality; high-quality value candidate |
| 4 – 6 | Moderate financial health; typical company range |
| 0 – 3 | Financially weak; high risk; potential short candidate |
The F-Score specifically measures year-over-year improvement — not just absolute levels. A company that improves on most of Piotroski's nine dimensions is showing positive operational momentum: profitability is increasing, leverage is decreasing, and operational efficiency is improving. These trends tend to continue.
Conversely, a company deteriorating on most dimensions (low F-Score) is likely to continue deteriorating — making it a risk for long investors and a potential opportunity for short sellers.
In his original study, Piotroski showed that a simple strategy of:
Would have generated a mean annual return 23% higher than the overall value stock universe over the 21-year test period. The F-Score is one of the most academically validated screening tools in quantitative finance.
Ask Diplyzer:
"What is [company]'s Piotroski F-Score? Which of the nine criteria does it pass and fail? Is the company scoring well on profitability, leverage, and operational efficiency?"
The Z-Score and F-Score serve complementary roles:
| Dimension | Altman Z-Score | Piotroski F-Score |
|---|---|---|
| Primary focus | Bankruptcy risk | Financial quality/momentum |
| Time horizon | 2-year bankruptcy prediction | Year-over-year improvement |
| Best for | Avoiding blow-ups | Finding quality value |
| Scale | Continuous score | 0-9 integer score |
The ideal fundamental setup:
This combination — improving financial quality, no distress risk, and cheap valuation — is the foundation of classic high-quality value investing.
Ask Diplyzer to screen for both:
"Find companies in the [sector] sector with a Piotroski F-Score of 7 or higher and an Altman Z-Score above 2.5. From those, which are trading at P/E ratios below the sector median?"