Altman Z Score
Returns the Altman Z-Score, a formula that predicts the probability of a company going bankrupt. Developed by Professor Edward Altman in 1968.
Interpretation
| Z-Score | Risk Zone |
|---|---|
| > 2.99 | Safe Zone - Low bankruptcy risk |
| 1.81 - 2.99 | Grey Zone - Moderate risk |
| < 1.81 | Distress Zone - High bankruptcy risk |
Formula Components (5 Variables)
Z = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E
Where:
- A = Working Capital / Total Assets
- B = Retained Earnings / Total Assets
- C = EBIT / Total Assets
- D = Market Value of Equity / Total Liabilities
- E = Sales / Total Assets
Notes
- Higher score indicates lower bankruptcy risk
- Originally designed for manufacturing companies
- Still widely used as a financial health indicator
Examples
=AltmanZScore()=IF(AltmanZScore()>2.99,"Safe","Review")=IF(AltmanZScore()<1.81,"Distress","")When to Use
- Credit analysis and lending decisions
- Investment due diligence
- Financial health screening
- Risk management
When NOT to Use
| Scenario | Use Instead |
|---|---|
| Earnings manipulation | BeneishMScore() |
| Financial strength score | FScore() |
| Service companies | Modified Z-Score models |
| Current valuation | PE, PB ratios |
Common Issues & FAQ
Q: What is a good Z-Score? A: Above 2.99 is considered safe. Between 1.81-2.99 is a grey zone. Below 1.81 indicates potential distress.
Q: Does this work for all companies? A: The original model was for manufacturing. Different versions exist for service, private, and emerging market companies.
Q: How accurate is this predictor? A: Studies show 80-90% accuracy in predicting bankruptcy within 2 years, but it's not foolproof.
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