This Altman Z-Score calculator estimates the Altman’s Z score which predicts bankruptcy of a company by using few financial ratios and a multiple discriminant analysis statistical method. There is more information on this model below the form.

Total assets:*
Working capital:*
Market value of equity:*
Retained earnings:*
Book value of debt:*
Sales value:*
EBIT value:*

How does this Altman Z-Score calculator work?

This is a financial tool that can help in evaluating the likelihood of a company to go bankrupt based on the model developed in 1968 by Edward Altman. The model aims to predict bankruptcy of a business by considering few traditional financial ratios and the multiple discriminant analysis statistical method. In regard of the accuracy of this model it is considered that it is 90% accurate in forecasting a business default one year into the future and somewhere around 80% accurate in predicting a financial distress two years into the future.

The algorithm behind the Altman Z-score calculator is based on this formula:

Altman Z-Score = 1.2*FF1 + 1.4*FF2 + 3.3*FF3 + 0.6*FF4 + 1.0*FF5

Where the financial ratios are determined by using the balance sheet figures given:

FF1 = Working capital/Total assets
FF2 = Retained earnings/Total assets
FF3 = EBIT/Total assets
FF4 = Market value of equity/Total liabilities
FF5 = Sales value/Total assets

Interpretation of levels of the Altman’s Z-score

  • If Z-score => 3.0 then the company is considered ‘safe’ while it is highly unlikely for bankruptcy or any failure/financial catastrophe to occur.

  • If Z-score is between =>2.7 and < 3 then the company should stay on alert as this level should be handled with caution.

  • If Z-score is between =>1.8 and <2.7 then there are good chances for the company to go bankrupt within 2 years of business activity from the date the financial figures account for.

  • If Z-score is below 1.80 then there is a very high probability that the company faces financial catastrophe.

As it can be observed, as a general rulethe lower/higher the score is, the lower/higher the likelihood of bankruptcy.

Example of a calculation

In case of a company with the following balance sheet figures and see its status:

- total assets = $790,000

- working capital = $50,000

- Market value of equity = $120,000

- Retained earnings = $45,000

- Book value of debt = $75,000

- Sales value = $240,000

- EBIT value = $89,000

Altman Z-Score: 1.79

There is a very high probability that the company faces financial catastrophe.

20 Feb, 2015 | 0 comments

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