Meaning:
The Altman Z-Score is a financial model developed by Professor Edward Altman in 1968 to predict the probability of a company going bankrupt. It combines several financial ratios to assess a firm’s financial health and credit risk.
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🔢 Formula:
Z = 1.2X_1 + 1.4X_2 + 3.3X_3 + 0.6X_4 + 1.0X_5
Where:
• X₁ = Working Capital / Total Assets
• X₂ = Retained Earnings / Total Assets
• X₃ = EBIT / Total Assets
• X₄ = Market Value of Equity / Total Liabilities
• X₅ = Sales / Total Assets
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💡 Interpretation:
• Z > 2.99 → Safe Zone (Financially stable)
• 1.81 < Z < 2.99 → Grey Zone (Possible risk)
• Z < 1.81 → Distress Zone (High bankruptcy risk)
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🏢 Use Case:
Used by investors, lenders, and analysts to evaluate a company’s creditworthiness and insolvency risk—especially for manufacturing and listed firms.
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Example:
If a company has a Z-Score of 1.4, it indicates a high chance of financial distress, signaling investors to proceed cautiously.
Regards
Shining Stars 🌟🌟🌟
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