Financial Statement Analysis Magazine Section

Ratio - Altman Z Score

ratioALTMAN Z-SCORE:                                                                           onlinecalculator iconOnline Z-Score Calculator

Using Multiple Discriminant Analysis Edward Altman 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:
{For Z Score the following 8 inputs are essential: {Current Assets; Current Liabilities; Total Liabilities; EBIT; Total Assets; Net Sales; Retained Earnings; Market Value of Equity}

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.

 

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