Harness Money

What is the Altman Z-Score?

Altman Z-Score is a financial formula developed by Edward Altman in the late 1960s. It is used to assess the financial health and bankruptcy risk of a company. The Z-Score combines several financial ratios to calculate a single score that indicates the likelihood of a company going bankrupt within a specific period, usually one to two years.

The formula takes into account five financial ratios: working capital/total assets, retained earnings/total assets, earnings before interest and taxes (EBIT)/total assets, market value of equity/book value of total liabilities, and sales/total assets. These ratios reflect different aspects of a company’s financial performance and stability.

By assigning weights to each ratio and summing them, the Z-Score provides a numeric value. The interpretation of the Z-Score is as follows:

– Z-Score > 3: Indicates a safe financial position with a low probability of bankruptcy.

– 1.8 < Z-Score < 3: Suggests a moderate risk of bankruptcy.

– Z-Score < 1.8: Suggests a high probability of bankruptcy.

It’s important to note that the Z-Score was initially designed for public manufacturing companies, and its accuracy might vary across different industries or company types. Nevertheless, it remains a popular tool for assessing financial distress and bankruptcy risk.