Altman Z-Score
View All TermsZ-Score model is an accurate forecaster of failure up to two years prior to distress. It can be considered the assessment of the distress of industrial corporations. Altman Z-Score is calculated with this formula: Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5 where X1 = working capital/total assets, X2 = retained earnings/total assets, X3 = earnings before interest and taxes/total assets, X4 = market value equity/book value of total liabilities, X5 = sales/total assets. The zones of discrimination were as such: Distress Zones 1.8 <= Grey Zones <= 3 Safe Zones. Study by Altman found that companies that are in Distress Zone have more than 80% of chances of bankruptcy in two years. X1: The working capital/Total Assets ratio is a measure of the net liquid assets of the firm relative to the total capitalization. Working capital is defined as the difference between current assets and current liabilities. X2: Retained Earnings / Total Assets: the RE/TA ratio measures the leverage of a firm. Those firms with high RE, relative to TA, have financed their assets through retention of profits and have not utilized as much debt. X3, Earnings Before Interest and Taxes / Total Assets (EBIT/TA): This ratio is a measure of the true productivity of the firm™s assets, independent of any tax or leverage factors. X4, Market Value of Equity / Book Value of Total Liabilities (MVE/TL): The measure shows how much the firm™s assets can decline in value (measured by market value of equity plus debt) before the liabilities exceed the assets and the firm becomes insolvent. X5, Revenue / Total Assets (S/TA): The capital-turnover ratio is a standard financial ratio illustrating the sales generating ability of the firm™s assets. Read more about Altman Z-score and the original research.
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