The Z-Score is a measure that uses a combination of five ratios that, over a two-year period, successfully predict forthcoming company bankruptcies approximately 72% of the time. Using this means, you can perform the calculation (though it's time consuming) on your favorite stock. Here are some shortcuts that'll save you some time, not to mention your sanity.
IN PICTURES: How To Make Your First $1 Million

Retained Earnings/Total Assets
The five ratios are a combination of the balance sheet and income statement. One telltale sign of a bad score (those under 1.8) is negative retained earnings. When combined with a smaller amount of total assets, it's almost lethal. If your business is losing money, and has been for some time, one of the only ways to survive is to sell-off assets. If you don't have them to sell, you are one step closer to the grave.

Retained Earnings/Total Assets
Company Retained Earnings Total Assets Score
Jamba (Nasdaq:JMBA) $346 million $113 million 3.1
Perfumania (Nasdaq:PERF) $67 million $311 million 0.2
Talbots (NYSE:TLB) $52 million $674 million 0.1
Zale (NYSE:ZLC) $564 million $1.2 billion 0.5
Gap (NYSE:GPS) $11.2 billion $7.3 billion 1.5
Buckle (NYSE:BKE) $308 million $509 million 0.6

Market Cap/Total Liabilities
This is the fourth ratio in the Z-Score. A number higher than three is virtually guaranteed a strong Z-Score. That's because a company's market cap is often a reflection of how investors feel about its level of debt. Therefore, the higher the total liabilities, the lower the market cap, which results in a lower score and ultimately a weaker overall Z-Score. It's definitely counter intuitive.

Market Cap/Total Liabilities
Company Market Cap Total Liabilities Score
Jamba (Nasdaq:JMBA) $125.8 million $96.0 million 1.3
Perfumania (Nasdaq:PERF) $79.4 million $262.0 million 0.3
Talbots (NYSE:TLB) $795.2 million $510.0 million 1.6
Zale (NYSE:ZLC) $92.2 million $852.0 million 0.1
Aeropostale (NYSE:ARO) $2.5 billion $369.0 million 6.8
Jos. A Bank (Nasdaq:JOSB) $1.2 billion $161.0 million 7.5

Sales/Total Assets
Higher is definitely the better on this one. Let's say you have Company A with $1 billion in sales and $500 million in total assets and Company B with $2 billion in sales and the same total assets. Company B's score is double Company A's is, because it's generating twice the amount of sales from the same amount of assets. Of course, we don't know how profitable those additional sales are, but assuming margins are similar, the return on assets would be approximately double also. Why spend $1 to make $2 when you can spend the same dollar and make four? Thoughtful spending is an indicator of responsible management, and usually leads to a strong Z-Score. The corollary is the fact that a poor Z-Score is often the result of harmful spending.

Sales/Total Assets
Company Sales Total Assets Score
Jamba (Nasdaq:JMBA) $271 million $113 million 2.4
Perfumania (Nasdaq:PERF) $508 million $311 million 1.6
Talbots (NYSE:TLB) $1.2 billion $674 million 1.8
Zale (NYSE:ZLC) $1.6 billion $1.2 billion 1.3
Urban Outfitters (Nasdaq:URBN) $2.1 billion $1.7 billion 1.2
Lululemon (Nasdaq:LULU) $564 million $364 million 1.5

Bottom Line
These three of the five items that make up the Z-Score are listed in order of importance. You won't have a good Z-Score if retained earnings aren't positive, it's that simple. If they are positive, check the market cap and total assets. If the number's above three, you won't need to do any more calculations. Remember, the Z-Score is a predictor of future viability. A high score doesn't guarantee positive returns on your investment but it does tell you the likelihood of your stock being around in two years, and you can't hit the jackpot if you're not in the game. (For related reading, check out Z Marks The End.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Will Virtusa Corporation's Stock Keep Chugging in 2016? (VRTU)

    Read a thorough review and analysis of Virtusa Corporation's stock looking to project how well the stock is likely to perform for investors in 2016.
  2. Stock Analysis

    Analyzing Porter's Five Forces on JPMorgan Chase (JPM)

    Examine the major money-center bank holding firm, JPMorgan Chase & Company, from the perspective of Porter's five forces model for industry analysis.
  3. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  4. Stock Analysis

    Analyzing Dish Network's Return on Equity (ROE) (DISH, TWC)

    Analyze Dish Network's return on equity (ROE), understand why it has vacillated so greatly in recent years and learn what factors are influencing it.
  5. Fundamental Analysis

    5 Must-Have Metrics For Value Investors

    Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.
  6. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  7. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  8. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  9. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  10. Stock Analysis

    The Top 5 Micro Cap Alternative Energy Stocks for 2016 (AMSC, SLTD)

    Follow a cautious approach when purchasing micro-cap stocks in the alternative energy sector. Learn about five alternative energy micro-caps worth considering.
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  3. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  4. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  5. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  6. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
Trading Center