Altman Z-Score

Altman Z-Score is a bankruptcy prediction ratio, measuring a company’s health and likelihood of bankruptcy. Several key ratios from the company balance sheet and income statement are used in the calculation.

Altman Z-Score

Altman Z-Score is a bankruptcy prediction ratio, measuring a company’s health and likelihood of bankruptcy. Several key ratios from the company balance sheet and income statement are used in the calculation.

The Z-Score model is the 1960′s brainchild of Professor Edward Altman of NYU, not to be confused with the Z-Score for estimation of normal distributions.


Altman Z-Score Calculation

The Z-score is a linear combination of common business ratios, weighted by coefficients. The coefficients were developed by studying financial figures from a set of firms that had declared bankruptcy then comparing them with a matched sample of companies which had survived.

Altman's work built upon research by accounting researcher William Beaver and others. In the 1930s, Mervyn and others had collected matched samples and determined that certain financial ratios appeared to be valuable in predicting bankruptcy. Altman's Z-score is a customized version of the discriminant analysis technique of R. A. Fisher (1936).The Altman Z-Score is calculated as follows (for public companies):

Formula for Altman Z-Score

Interpretation of Altman Z-Score

The Altman Z-Score is a quantitative method for determining a company’s financial health. Companies that have a Z-Score greater than 3.0 have a low likelihood of bankruptcy.  An Altman Z-Score below 1.80 signals a high probability of financial catastrophe.

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