# Calculate and Interpret the Altman Z-Score

The *Z-score*, also known as the Zeta Model or Altman Z-score is a financial formula used for predicting the possibility of bankruptcy for a company. Developed in 1968 by Edward Altman, the formula seeks to express the chances that a public company will go bankrupt within two years. The output number the model produces is known as the company’s Z-score and is seen as a reasonably accurate indicator of financial distress and the potential for bankruptcy within that two-year timeframe.

#### How the Z-Score is Calculated

The Z-Score formula can be written as:

##### Z = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

Where:

Z = Z-Score

A = Working Capital / Total Assets

B = Retained Earnings / Total Assets

C = Earnings Before Interest & Taxes / Total Assets

D = Market Value of Equity / Total Assets

E = Sales / Total Assets

A low Z-score indicates a company that is likely to go bankrupt. Specifically, a Z-Score of lower than 1.8 indicates a high likelihood of bankruptcy while a score of greater than 3.0 means that the company is unlikely to go bankrupt in the next two years. While the likelihood of bankruptcy for companies that have Z-Scores between 1.8 and 3.0 is not high, they are often seen as risky investments.

#### How Accurate is the Z-Score?

By some statistical measures, the Z-score model has proven to accurately predict bankruptcy in 95% of the cases one year prior in advance. The measure can be used to guide investors in their choices and decrease portfolio risk. The model is also used to evaluate the stability of potential customers and the financial health of the company suppliers.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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