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Geoff Gannon Investor Questions Podcast #13: How Do You Find a Stock's Z-Score?

June 11, 2010 | About:
Geoff Gannon

Geoff Gannon

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Geoff Gannon
Geoff Gannon


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Comments

mattius10
Mattius10 - 4 years ago
In regards to the Asset Turnover ratio in question 5, you reference the previous podcast that was about F-Score. In the F-Score podcast you recommend using "starting assets" to calculate the Asset Turnover Ratio. Is this also the case when calculating Asset Turnover for the Z-Score? Also, are there any other questions where we should use starting assets (as opposed to the current year's total assets) for Z-Score?
Geoff Gannon
Geoff Gannon - 4 years ago
Mattius,

I only mentioned using starting assets for the F-Score, because Professor Piotroski specifically said that's what he used in his original paper.

Often, it won't make much of a difference which asset number you use. I can't link to Professor Altman's original 1968 paper that discussed the Z-Score study methodology, but you can find it online if you have access to a scholarly journal database like JSTOR.

Balance sheets are usually presented with last year's balance sheet there right alongside this year's. So the starting assets would be last year's ending assets. The ending assets would be this year's ending assets. And the simplest average assets for the year is just those two numbers added together and divided by 2. You can check all 3 methods for a few stocks and see how little they normally differ.

Personally, I would use starting assets. It's one less step. But, obviously, never use starting assets when you do a quarter to quarter comparison, only year over year. Assets fluctuate a lot in some industries during the year due to seasonality.

mattius10
Mattius10 - 4 years ago
Thanks Geoff. Appreciate the feedback.
v4value
V4value - 3 years ago
Geoff,

Given that the Total Assets element is so fundamental to the Z-Score, how would you go about treating intangible assets? I've been analysing a UK stock (Armour Group, AMR) and they have a Z-Score of 2.4 with intangibles included and a Z-Score of 3.8 excluding intangibles. Do you have a view on which way to go, because it's fundamental to the outcome?

As always, you're advice is much appreciated.

Regards

Anthony
gnaray
Gnaray - 2 years ago
Geoff,

Do you adjust workiing capital for excess cash when calculating Z score ?

Thanks,

Gopal

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