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Altman Z-Score

The Altman Z-Score is a method to determine the financial health of a company.

Expanded Definition

The Altman Z-Score was developed by New York University professor Edward I. Altman. It is intended to determine the risk of a company going bankrupt.

The original Z-score formula was as follows:

  • Z = 0.012X1 + 0.014X2 + 0.033X3 + 0.006X4 + 0.999X5</math>

Where:

  • X1 = Working Capital / Total Assets
  • X2 = Retained Earnings / Total Assets
  • X3 = Earnings Before Interest and Taxes / Total Assets
  • X4 = Market Value of Equity / Book Value of Total Liabilities
  • X5 = Sales / Total Assets

Altman found that the score had an 84% accuracy rate of predicting bankruptcy within two years for companies with a score below 1.81.

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