Articles on Bankruptcy & Insolvency Issues

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

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

(This Model of Z-Score 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 Z-Score. 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 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 five A to E ratios are multiplied by the weightage as above, and the results are added together to arrive at the Altman Z-Score. 

 Altman 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.

Use the following online Z-Score 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

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