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