Altman Z-Score

calender iconUpdated on June 10, 2024
corporate finance and accounting
financial ratios

The Altman Z-score is a statistical tool used to assess the financial health of a company. It is based on the company’s current assets, current liabilities, quick assets, and retained earnings.

Formula:

Z-score = 0.5232 + 0.1999*X - 1.2824*Y

where:

  • X is the working capital/current liabilities ratio
  • Y is the retained earnings/assets ratio

Interpretation:

  • A Z-score above 3 is considered overvalued and at high risk of bankruptcy.
  • A Z-score between -1 and 3 is considered to be at normal risk.
  • A Z-score below -1 is considered undervalued and at low risk of bankruptcy.

Uses:

  • Investors use the Z-score to assess the financial health of a company.
  • Companies use the Z-score to monitor their own financial health and to compare themselves to competitors.
  • Creditors use the Z-score to assess the risk of lending to a company.

Limitations:

  • The Z-score does not consider industry differences.
  • The Z-score does not consider company size.
  • The Z-score does not consider other factors that may influence financial health, such as economic conditions and industry trends.

Additional Notes:

  • The Altman Z-score is a simple metric and should not be used as the sole basis for making investment decisions.
  • It is important to consider other factors, such as the company’s industry, size, and financial performance.
  • The Z-score is a powerful tool for analyzing company financial health, but it is not a perfect one.

FAQ's

What is a good Altman Z-Score?

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A good Altman Z-Score is typically above 2.99, indicating that the company is in a safe financial zone and has a low risk of bankruptcy.

What does an Altman’s Z-Score of 3.5 indicate?

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What is a 2.7 Altman Z-Score?

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Why do we use the Altman Z-Score?

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Is a high or low Z-Score better?

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