Altman Z-Score

  

Categories: Metrics, Accounting

This is one of the finance world's Magic 8 Balls that determines whether a company probably is or probably isn’t headed for bankruptcy. (Only this set of balls actually has predictive value.)

The formula for the Altman Z-Score is z = 1.2W + 1.4R + 3.3E + 0.6M + 1.0S where W is the working capital divided by total assets, R is the retained earnings divided by total assets, E is earnings before interest and tax divided by total assets, M is the market value of equity divided by total liabilities, and S is sales divided by total assets. A value at 1.8 or below means the ship is probably making close and personal friends with a Titanic-killer iceberg while a value at 3 or above means the ship is probably not headed for Davy Jones' Locker.

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