Altman Z-Score

What is Altman Z-Score?

The Altman Z-Score is a financial metric developed
by Edward Altman in 1968.
It is designed to predict the probability of a company
going bankrupt within two years based on its
financial ratios.
The Z-Score incorporates multiple components such
as working capital, earnings and market value,
providing a comprehensive snapshot of a company's
risk level.
The key components of Altman Z-Score
Working Capital/Total Assets Ratio
Retained Earnings/Total Assets Ratio
Earnings Before Interest and Taxes (EBIT)/Total
Assets Ratio
Market Value of Equity/Total Liabilities Ratio
Sales/Total Assets Ratio
Formula:
Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1E
A = Working Capital/Total Assets Ratio
B = Retained Earnings/Total Assets Ratio
C = EBIT/Total Assets Ratio
D = Market Value of Equity/Total Liabilities Ratio

E = Sales/Total Assets Ratio

Z-Score ranges and their meanings:

Above 3: Safe from bankruptcy risk (Green Zone)

1.8 to 3: Moderate Risk (Grey Zone)

Below 1.8: High risk of bankruptcy (Red Zone)

IMPORTANCE
For Investors: Helps assess investment
risks and opportunities.

For Creditors: Helps in evaluating

creditworthiness and loan risk.

For Analysts: Provides a benchmark for

financial health assessments.
Limitations and Considerations
While Z-Score is a valuable tool, it has
limitations. It may vary across industries
and may not account for external
economic factors impacting company
performance.
Altman Z-Score is a valuable tool
for assessing financial health and
bankruptcy risk, providing insights
for decision-making and risk
management.
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