Z Score

Z Score

The Altman Z-score is the result of a credit-strength test that predicts the chance of bankruptcy for a publicly traded manufacturing company.

• The Altman Z-score is a metric for determining whether a company, particularly one in the manufacturing industry, is on the verge of bankruptcy. 

• Profitability, leverage, liquidity, solvency, and activity ratios are all considered in the calculation. 

• An Altman Z-score near to 0 indicates that a company is likely to go bankrupt, whereas a score closer to 3 indicates that a corporation is in good financial shape.

(Ref:  Altman, E, I., (2019)Distressed Firm and Bankruptcy Prediction in an International Context: A Review and Empirical Analysis of Altman’s Z-Score Model . Journal of Investment Consulting, Vol. 19, no. 1, 2019, pp. 15-22, Available at SSRN: https://ssrn.com/abstract=3522672 )

Z-Score Models for private firms : ζ = 0.717·x1 + 0.847·x2 + 3.107·x3 + 0.420·x4 + 0 .998·x5 

Z-Score Model for public firms : ζ = 0.012·x1 + 0.014·x2 + 0.033·x3 + 0.006·x4 + 0 .999·x5  

or 1.2·x1 + 1.4·x2 + 3.3·x3 + 0.6·x4 + 1.0·x5

Where:

• Zeta (ζ) is the Altman’s Z-score

• x1 is the Working Capital/Total Assets ratio

• x2 is the Retained Earnings/Total Assets ratio

• x3 is the Earnings Before Interest and Tax (EBIT)/Total Assets ratio

• x4 is the Market Value of Equity (Market capitalization)/Total Liabilities ratio

• x5 is the Total Sales/Total Assets ratio