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Quick Definition

A method to estimate a bankruptcy prediction for a company.

There's More to Financial Analysis Than You Think...

The Financial Analysis Success Kit can help!

Why you should take a look at the Financial Analysis Success Kit:

We've combined all our highly popular financial analysis tools into one mega-financial-analysis-kit that will save you hundreds of dollars if purchased separately. The kit contains 9 files packed with the most important financial ratio analysis tools you can find to help rocket your way to mastering financial analysis. The kit includes:

  1. The eBook "Learn Ratio Analysis In Minutes"

  2. The Learn Financial Ratio Analysis Excel Spreadsheet (2 versions!)

  3. A BONUS eBook..."Key Financial Statement Terms"

  4. Another HUGE BONUS...Five-Part Financial Ratio Cheat Sheet Series

The result? You get all these professionally created tools for a great low price.

Learn more on our product page:

Click the button to learn more about the Financial Analysis Success Kit

 

financial ratio analysis success kit

Click the button to learn more about the Financial Analysis Success Kit

Altmans Z Score Formula

3.3
 x 
 + 
0.999
 x 
 + 
 + 
 + 
=
Altmans Z Score

Explanation of Altmans Z Score

Altman’s Z-Score formula weighs five ratios then adds them together to come up with a bankruptcy prediction estimate for a company. This estimate of bankruptcy for publicly-held companies depends on the resulting score of Altman’s Z-Score formula, which the score is divided into four categories:
Less than 1.8: Bankruptcy risk is high
Between 1.8 and 2.7: Bankruptcy risk is fair
Between 2.7 and 3.0: Bankruptcy risk is possible, but not likely in the near-future
Higher than 3.0: Bankruptcy risk is low

Importance of Altmans Z Score

A score greater than 3.0, or an increasing Altman’s Z-Score is usually a positive sign. The higher the score, the better the company’s chances of avoiding bankruptcy, but this score should be checked against other companies and industry standards. It should be noted that large economic events, like an entire industry slowdown, would render this scoring method less accurate. The individual components of this formula should be monitored, as they are the key to understanding how the score was calculated.