Al Z-score Equation:
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The Al Z-score (Altman variant) is a financial metric used to predict the probability of a company going bankrupt within two years. It combines five different financial ratios to produce a single score that indicates financial health.
The calculator uses the Altman Z-score equation:
Where:
Explanation: The equation combines liquidity, profitability, leverage, solvency, and activity ratios to assess financial distress risk.
Details: The Z-score helps investors, creditors, and analysts assess a company's financial stability and bankruptcy risk. Scores below 1.8 suggest high risk, while scores above 3.0 indicate financial stability.
Tips: Enter the five financial ratios (A through E) as dimensionless values. The calculator will compute the Z-score which can be interpreted as follows:
Q1: What is the difference between the original and Altman variant Z-score?
A: The original Z-score was developed for manufacturing firms, while the Altman variant is adapted for private companies and non-manufacturers.
Q2: How accurate is the Z-score in predicting bankruptcy?
A: The model has about 72-80% accuracy in predicting bankruptcy one year before the event, and slightly less for two years before.
Q3: Can the Z-score be used for all types of companies?
A: While applicable to most, it works best for manufacturing firms and may need adjustments for financial institutions or service companies.
Q4: What are the limitations of the Z-score model?
A: It doesn't account for macroeconomic factors, industry-specific risks, or qualitative factors like management quality.
Q5: How often should Z-scores be calculated?
A: For monitoring purposes, quarterly calculation with financial statements is recommended.