What is Z-score?
By admin on October 20th, 2008Edward Altman developed a Z-score model based on five financial ratios to predict whether a company will go into bankrupt or not. Altman’s Z-score model is:
Z = 0.012 A + 0.014 B + 0.033 C + 0.006 D + 0.999 E.
Where:
A = net working capital / total assets
B = retained earning / total assets
C = earning before interest and taxes / total assets
D = market value of equity / book value of total liability
E = sales / total assets
Z = Z-score
If Z-score > 2.99, Z-score predict that the company will not fail within one year. Z-score between 1.81 and 2.99 is in gray area, which is difficult to predict. If Z-score < 1.81, Z-score predict that the company will fail within one year.