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.
References in periodicals archive ?
This study uses Altman Z-Score, Beneish model, as well as M-Score on set of data on small Malaysian firms to identify the presence of financial manipulations in their annual reports.
The dependent variable used to test the risk reduction hypothesis is the change in the Altman Z-score based on financial statement information from the fiscal years prior and subsequent to the IPO.
The methodology uses a modified Altman Z-score formula to identify the companies with the highest scores based on the weighted sum of five financial ratios: working capital to assets, retained earnings to assets, operating income to assets, leverage ratio and sales to assets.
moves towards acceptance of the International Financial Reporting Standard) will affect various financial ratios of the company, most notably the Altman Z-score.
The non-corrective action firms also have a lower Altman Z-Score than the computer industry, which indicates a higher risk of bankruptcy for these firms.
The best known of these models is the Altman Z-score.
In addition to these variables, we also calculated the Altman Z-score (1968) for the leasing and non-leasing firms.
For this article, the Altman Z-score is used to measure the client's financial condition.
2008) used Altman Z-score and ratio analysis approaches to conclude their views why the firms under study went bankrupt?
First, the company is required by First Security to maintain adequate financial ratios, most notably an Altman Z-score of greater than 3.
Exhibit 1 Calculation of Financial Ratios Current ratio = Current assets / Current liabilities Quick ratio = (Current assets = Inventory) / Current liabilities Days' sales in inventory = Inventory / Daily cost of goods sold [COGS/365] Debt ratio = Total liabilities / Total assets Debt-equity ratio = Total liabilities / Total common equity Return on assets = Net income / Average total assets Altman Z-score = 1.