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:

EBIT/Total Assets
x. 3.3
-4 to +8.0
Net Sales /Total Assets
x 0.999
-4 to +8.0
Market Value of Equity / Total Liabilities
x 0.6
-4 to +8.0
Working Capital/Total Assets
x 1.2
-4 to +8.0
Retained Earnings /Total Assets
-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. uses cookies to improve your online experience. These cookies are necessary for the website to function and cannot be switched off in our systems. Without this type of technology, our services will not work optimally or won't be able to provide certain features and functionalities. To find out more about our policy please click "More information". If you do not agree click "Decline". By clicking "Accept" below, you will be giving your consent to our cookie policy.
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