Z Score Altman

Posted in Finance, Accounting and Economics Terms, Total Reads: 1336
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Definition: Z Score Altman

It is a model based on the study used sixty-six failed/non-failed corporations selected from manufacturing industries: 22 ratios grouped under five categories; liquidity, profitability, leverage, solvency and activity ratios. Five ratios finally emerged as good predictors of corporate bankruptcy.

Altman Z Score Model

Z=1.2T1 + 1.4T2 + 3.3T3 + 0.6T4 + .999T5

where,

T1 = Working Capital / Total Assets

T2 = Retained Earnings / Total Assets

T3 = Earnings Before Interest and Taxes / Total Assets

T4 = Market Value of Equity / Total Liabilities

T5 = Sales/ Total Assets

Examples

Z > 2.99 -“Safe” Zones

1.81 < Z < 2.99 -“Grey” Zones

Z < 1.81 -“Distress” Zones





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