What is the Altman Z-Score?

The Altman Z-score (or simply, "Z-Score") is a statistical measurement of one

variables relationship to the mean (average) of a group of values. More
specifically, the Z-score states the number of standard deviations a variable lies
from the mean of the group of values. A zero Z-score indicates that the mean of
the group and the value being tested is identical. A one or negative one Z-score
indicates that the value is one standard deviation from the mean. A positive one
indicates that it is one standard deviation above, while a negative one indicates
that it is one standard deviation below the mean. Z-scores are measures of an
observation's variability and can be put to use by traders in determining market
volatility. The Z-score is more commonly known as the Altman Z-score. The
Altman Z-Score is the formula, consisting of five fundamental ratios, used to
determine the financial condition of the company and probability for bankruptcy.
The Altman Z-Score formula helps the investors to evaluate the business financial
strength. This Formula also helps predicting the business bankruptcy

The formula Altman Z-score

The Altman Z-score formula calculation is as follows: Altman Z-score = 1.2 * T 1 +

1.4 * T 2 + 3.3 * T 3 + 0.6 * T 4 + 1.0 * T 5 Where: T 1: (Working Capital / Total
Assets) T 2: (Undistributed profits / Total Assets) T 3 : (EBITDA / Total Assets) T 4 :
(Stock Market Capitalization / Total Debt) T 5 : (Net Sales / Total Assets)

How to use the Altman z-score to predict bankruptcies

The result of the Altman Z-score formula determines if the company is in the safe
zone, gray zone or in danger zone. Z-score more than 2.99 means Safe area. Z-
score between 1.81 and 2.99 means a gray area, specifying that the company may
go bankrupt in the following two years. Z-score less than 1.81 means the danger
zone; i.e., Imminent bankruptcy. The accuracy of the Altman Z-score in the
prediction of bankruptcies The Altman Z-score formula is 72% accurate two years
in advance concerning the bankruptcy, with a false negative rate of 6%. In its trial
era of 31 years, the accurate rate was in between 80% and 90%, one year in
advance concerning the bankruptcy, with a false negative rate in between 15%
and 20%. Hence, it can be said that the Altman Z-score formula predictions are
considerably accurate. However, it is not an absolute formula, thus, must be used
in parallel with a qualitative analysis of the business for more accurate
predictions.