What is the Altman Z-score?
The Altman Z-score is one of the well-known models of enterprise bankruptcy prediction, designed to apply only to manufacturing firms that are near bankruptcy. It was not based on a sample, which includes non-manufacturing firms such as service firms, banks, etc. Note that this is a probabilistic model, so it will have classification limitations.
Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E
A = Working capital / Total assets
B = Retained earnings / Total assets
C = Earnings before interest and tax / Total assets
E = Revenues / Total assets
What does the Altman Z-score mean?
The Altman Z-score helps investors to gauge the probability of a company going bankrupt. Generally, firms with a score above 3.00 have a low probability of bankruptcy, and those with a Z-score of less than 1.81 have a relatively high probability of bankruptcy.