Measuring the 'Fiscal-Fitness' of a company: The Altman Z-Score
(This Model of Z-Score is for Publicly Traded Firms. To learn about the Z'-Score Model for Private Firms Click Here)
Using Multiple Discriminant Analysis Edward Altman combined a set of 5 financial ratios to come up with the Altman Z-Score. This score uses statistical techniques to predict a publicly traded company's probability of failure using the following 8 variables from a company's financial statements:
{For Z Score the following 8 inputs are essential: {Current Assets; Current Liabilities; Total Liabilities; EBIT; Total Assets; Net Sales; Retained Earnings; Market Value of Equity}
The 5 financial ratios in the Altman Z-Score and their respective weight factor is as follows:
RATIO | WEIGHTAGE | ||
A | EBIT/Total Assets | x. 3.3 | -4 to +8.0 |
B | Net Sales /Total Assets | x 0.999 | -4 to +8.0 |
C | Market Value of Equity / Total Liabilities | x 0.6 | -4 to +8.0 |
D | Working Capital/Total Assets | x 1.2 | -4 to +8.0 |
E | Retained Earnings /Total Assets | x1.4 | -4 to +8.0 |
These five A to E ratios are multiplied by the weightage as above, and the results are added together to arrive at the Altman Z-Score.
Altman Z-Score= (Ax 3.3)+(Bx 0.99)+ (Cx 0.6)+(Dx 1.2)+(Ex 1.4)
The Interpretation of Z Score:
Z-SCORE ABOVE 3.0 -The company is safe based on these financial figures only.
Z-SCORE BETWEEN 2.7 and 2.99 - On Alert. This zone is an area where one should exercise caution.
Z-SCORE BETWEEN 1.8 and 2.7 - Good chances of the company going bankrupt within 2 years of operations from the date of financial figures given.
Z-SCORE BELOW 1.80- Probability of Financial embarassment is very high.
Use the following onlineZ-Score Insolvency Prediction Calculator to assess the probability of insolvency of a publicly traded company.
Note: To calculate the Z'-Score for a private firm (click here)
