Altman's z-score

The Altman Z-score is a formula used to assess the likelihood of bankruptcy for a publicly traded manufacturing company. Developed by Professor Edward Altman, it considers five financial ratios based on data from a company’s annual 10-K report. These ratios help predict whether a company is at risk of becoming insolvent. Let’s explore the details:

1. Components of Altman Z-Score: The formula includes the following ratios: A: Working capital / Total assets B: Retained earnings / Total assets C: Earnings before interest and tax (EBIT) / Total assets D: Market value of equity / Total liabilities E: Sales / Total assets
2. Calculating Altman Z-Score: The Z-score is computed as follows:

Altman?Z-Score=1.2A+1.4B+3.3C+0.6D+1.0E

1. Interpreting Z-Score Values: A Z-score close to 0 suggests a high risk of bankruptcy. A Z-score closer to 3 indicates solid financial positioning. Investors can use Z-scores to decide whether to buy or sell a stock: Closer to 3: Consider buying. Closer to 1.8: Consider selling or shorting. Recent data suggests that a Z-score closer to 0 is cause for concern about a company’s financial strength.

The Altman Z-score is a reliable measure for assessing credit risk and making informed investment decisions.