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. We conducted a series of regressions in which we examined the relationship between changes in the Z-score with changes in the individual components of the model.
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.
As seen in Table 2, changes in any of the five variables comprising the Altman Z-score had a significant relationship with changes in the Z-score itself.
The Altman Z-scores, although less positive than in 1998, are still in the "no threat" bankruptcy region.
Hence, as of the end of Salton's 1999 fiscal year, the Altman Z-score model predicts that the company is financially sound.
* Comparative Altman Z-Scores to anticipate the probability of business failure