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Insolvency Prediction- Altman Z Score

Measuring the 'Fiscal-Fitness' of a company: The Altman Z-Score

In the early 60's Edward Altman, using Multiple Discriminant Analysis combined a set of 5 financial ratios to come up with the Altman Z-Score. This score uses statistical techniques to predict a company's probability of failure using the following 8 variables from a company's financial statements:
The ones in Green are from the Income Statement and the ones in Red from the Balance Sheet

Use the following Z-Score Insolvency Prediction Calculator to assess a company.

1. Earnings Before Interest & Taxes:EBIT

2. Total Assets

3. Net Sales

4. Market Value of Equity

5. Total Liabilities

6. Current Assets

7. Current Liabilities

8. Retained Earnings

The 5 financial ratios in the Altman Z-Score and their respective weight factor is as follows:

	RATIO	WEIGHTAGE
A	EBIT/Total Assets	x. 3.3	-4 to +8.0
B	Net Sales /Total Assets	x 0.999	-4 to +8.0
C	Market Value of Equity / Total Liabilities	x 0.6	-4 to +8.0
D	Working Capital/Total Assets	x 1.2	-4 to +8.0
E	Retained Earnings /Total Assets	x1.4	-4 to +8.0

These ratios are multiplied by the weightage as above, and the results are added together.
Z-Score = A x 3.3 + B x 0.99 + C x 0.6 + D x 1.2 + E x 1.4

The Interpretation of Z Score:

Z-SCORE ABOVE 3.0 -The company is safe based on these financial figures only.
Z-SCORE BETWEEN 2.7 and 2.99 - On Alert. This zone is an area where one should exercise caution.
Z-SCORE BETWEEN 1.8 and 2.7 - Good chances of the company going bankrupt within 2 years of operations from the date of financial figures given.
Z-SCORE BELOW 1.80- Probability of Financial embarassment is very high.