Altman Z-Score

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Altman Z-Score

A method for determining the likelihood of a company's bankruptcy in the coming two years. A company's Z-score is determined by the application of four or five ratios as variables, each weighted for importance according to a certain formula. The original ratios are working capital / total assets, retained earnings / total assets, EBIT / total assets, market value of equity / book value of liabilities, and sales / total assets. Different versions of the Altman Z-score may use slightly different variables and may weight them differently. A higher score is a positive sign, with a score over 2.99 meaning the company is "safe." The Z-score has predicted corporate bankruptcies with more than 70% accuracy.