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Wednesday, February 3, 2010

Altman z-score

Altman z-score

Formula to calculate Altman's Z-Score:


z-score = 1.2 a + 1.4 b + 3.3 c + d/e+.6f/g

where :

a = working capital,

b = retained earnings,

c = operating income,

d = sales,

e = total assets,

f = net worth and

g = total debt

Altman z-score definition and explanation:
The Altman z-score is a bankruptcy prediction calculation.

The z-score measures the probability of insolvency (inability to pay debts as they become due).

1.8 or less indicates a very high probability of insolvency.

1.8 to 2.7 indicates a high probability of insolvency.

2.7 to 3.0 indicates possible insolvency.

3.0 or higher indicates that insolvency is not likely.

The Altman z - score is included in the financial statement ratio analysis spreadsheets highlighted in the left column, which provide formulas, definitions, calculation, charts and explanations of each ratio.

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