Altman Z-Score

Altman Z-Score

A predictive model created by Edward Altman in the 1960s. This model combines five different financial ratios to determine the likelihood of bankruptcy amongst companies.

Notes:

Generally speaking, the lower the score, the higher the odds of bankruptcy. Companies with Z-Scores above 3 are considered to be healthy and, therefore, unlikely to enter bankruptcy. Scores in between 1.8 and 3 lie in a grey area.

This is a relatively accurate model -- real world application of the Z-Score successfully predicted 72% of corporate bankruptcies two years prior to these companies filing for Chapter 7.

See also: Bankruptcy, Bankruptcy Risk, Chapter 11, Chapter 7