Measuring the 'FiscalFitness' of a company: The Altman ZScore
(This Model of ZScore is for Publicly Traded Firms. To learn about the Z'Score Model for Private Firms Click Here)
Using Multiple Discriminant Analysis Edward Altman combined a set of 5 financial ratios to come up with the Altman ZScore. This score uses statistical techniques to predict a publicly traded 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 ZScore 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 five A to E ratios are multiplied by the weightage as above, and the results are added together to arrive at the Altman ZScore.
Altman ZScore = (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:
ZSCORE ABOVE 3.0 The company is safe based on these financial figures only.
ZSCORE BETWEEN 2.7 and 2.99  On Alert. This zone is an area where one should exercise caution.
ZSCORE 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.
ZSCORE BELOW 1.80 Probability of Financial embarassment is very high.
Use the following online ZScore Insolvency Prediction Calculator to assess the probability of insolvency of a publicly traded company.
Note: To calculate the Z'Score for a private firm (click here)
Calculator  Altman Z Score