Altman Z-score

What is the Altman Z-score?

The Altman Z-score is one of the well-known models of enterprise bankruptcy prediction, designed to apply only to manufacturing firms that are near bankruptcy. It was not based on a sample, which includes non-manufacturing firms such as service firms, banks, etc. Note that this is a probabilistic model, so it will have classification limitations.

Formula:

Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

Definitions:

A = Working capital / Total assets 

B = Retained earnings / Total assets 

C = Earnings before interest and tax / Total assets 

D = Market value of equity / Total liabilities 

E = Revenues / Total assets

What does the Altman Z-score mean?

The Altman Z-score helps investors to gauge the probability of a company going bankrupt. Generally, firms with a score above 3.00 have a low probability of bankruptcy, and those with a Z-score of less than 1.81 have a relatively high probability of bankruptcy.

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