Altman Z-Score: A tool to predict likelihood of bankruptcy

The Altman Z-Score is a measure of a company’s health and likelihood of bankruptcy. It was developed by Edward Altman in 1968 when he was a finance professor at NYU. This is a mathematical formula which uses financial data from company’s income statement and balance sheet. It generates a number which tells you the likelihood of bankruptcy or financial embarrassment. It has a reported 72% accuracy in predicting bankruptcies two years in advance.

Z-Score Formula for Public Companies:

T₁ = Working Capital / Total Assets

T₂ = Retained Earnings / Total Assets

T₃ = Earnings Before Interest and Taxes / Total Assets

T₄ = Market Value of Equity / Total Liabilities

T₅ = Sales/ Total Assets

Z-Score Bankruptcy Model:

Z = 1.2T₁ + 1.4T₂ + 3.3T₃ + 0.6T₄ + .999T₅



Zones of Discrimination:

Z > 2.99 -“Safe” Zone

1.8< Z< 2.99 -“Grey” Zone

Z< 1.80 -“Distress” Zone

Download free spreadsheet for Altman Z-Score Calculation

Old School Value has a spreadsheet for calculating Z score for any company by typing in a ticker of the company.

Z-Score Formula for Private Firms:

T₁ = (Current Assets-Current Liabilities) / Total Assets

T₂ = Retained Earnings / Total Assets

T₃ = Earnings Before Interest and Taxes / Total Assets

T₄ = Book Value of Equity / Total Liabilities

T₅ = Sales/ Total Assets

Z' Score Bankruptcy Model:

Z' = 0.717T₁ + 0.847T₂ + 3.107T₃ + 0.420T₄ + 0.998T₅

Zones of Discrimination:

Z' > 2.9 -“Safe” Zone

1.23< Z'< 2. 9 -“Grey” Zone

Z'< 1.23 -“Distress” Zone

Download free spreadsheet for Altman Z-Score Calculation (Private Firms)

Z-Score for Non Manufacturer Industrials and Emerging Market Credits:

T₁ = (Current Assets-Current Liabilities) / Total Assets

T₂ = Retained Earnings / Total Assets

T₃ = Earnings Before Interest and Taxes / Total Assets

T₄ = Book Value of Equity / Total Liabilities

Z-Score Bankruptcy Model:

Z = 6.56T₁ + 3.26T₂ + 6.72T₃ + 1.05T₄

Zones of Discrimination:

Z > 2.6 -“Safe” Zone

1.1< Z< 2. 6 -“Grey” Zone

Z< 1.1 -“Distress” Zone

Download free spreadsheet for Altman Z-Score Calculation (Non Manufacturer Industrial and Emerging Market Credits)

Reference:

Altman, Edward I. (July, 2000). "Predicting Financial Distress of Companies" http://pages.stern.nyu.edu/~ealtman/Zscores.pdf

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