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 ?
Altman Z-Scores, already familiar to the credit and collections team, became the foundation, but Z-Scores didn't cover financial institutions or private companies, so Microsoft added Financial Health Ratings from Rapid Ratings to fill this void and used both metrics where appropriate.
Because of its significance as a tool used in credit analysis, we expanded the analysis to examine how operating leases might affect Altman Z-scores.
Having explored the impact that capitalizing operating leases has on the calculation and interpretation of Altman Z-scores, we next briefly examine alternative methods for valuing the operating leases.
The best known of these more sophisticated models is the Altman Z-score (Altman, 1968).