Altman Z-Score Formula:
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The Altman Z-Score is a financial formula that measures a company's financial health and predicts the probability of bankruptcy. It combines five different financial ratios to produce a single score.
The calculator uses the Altman Z-Score formula:
Where:
Explanation: The formula weights each financial ratio differently based on its predictive power for bankruptcy.
Details: The Z-Score helps investors, creditors, and analysts assess a company's financial stability and bankruptcy risk. Scores below 1.8 indicate high bankruptcy risk, while scores above 3.0 suggest financial stability.
Tips: Enter all five financial ratios as decimal values (e.g., 0.25 for 25%). The calculator will compute the weighted sum to produce the Z-Score.
Q1: What do different Z-Score values mean?
A: Below 1.8 = high bankruptcy risk; 1.8-2.99 = gray area; Above 3.0 = low bankruptcy risk.
Q2: Can the Z-Score be used for all companies?
A: It works best for manufacturing firms with assets >$1 million. Different models exist for private companies and non-manufacturers.
Q3: How accurate is the Z-Score?
A: It's about 72-80% accurate in predicting bankruptcy one year prior and becomes less accurate further out.
Q4: What are the limitations of the Z-Score?
A: It may be less accurate for new companies, service firms, or companies in different industries.
Q5: Should I make investment decisions based solely on Z-Score?
A: No, it should be one of several tools used in financial analysis.