Altman Z-Score is a formula used to predict the probability that a firm will go into bankruptcy within two years. The original paper by Professor Edward I. Altman can be found here.
The formula for Z-Score is as follows:
Z = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E
A = Working Capital / Total Assets
B = Retained Earnings / Total Assets
C = EBIT / Total Assets
D = Market Value Of Equity / Book Value Of Total Liabilities
E = Sales / Total Assets
For non-U.S. and financial institutions, a modified version of the formula called Z"-Score is used.
Z" = 6.56A + 3.26B + 6.72C + 1.05D + 3.25
A = Working Capital / Total Assets
B = Retained Earnings / Total Assets
C = Operating Income / Total Assets
D = Book Value of Equity / Book Value Of Liabilities
The formula for Z-Score is as follows:
Z-Score:
Z > 2.99 | Safe Zone
2.99 > Z > 1.81 | Gray Zone
Z < 1.81 | Distress Zone
Z"-Score:
Z > 2.6 | Safe Zone
2.6 > Z > 1.1 | Gray Zone
Z < 1.1 | Distress Zone
Click the link below to download a spreadsheet with an example Altman Z-Score calculation for Haryana Capfin Ltd below: