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.