What is the Altman Z-score?
The Altman Z-score is a formula that is designed to predict the likelihood, or otherwise, of a publicly-quoted manufacturing company becoming insolvent. It was devised by a professor of finance, Edward Altman, in 1967 and was published the following year.
Where have you heard about the Altman Z-score?
It is not exactly an everyday conversational topic, but as an investor you may have come across it in guides to investment. Your financial adviser may have mentioned the Altman Z-score when discussing possible share selections in the manufacturing sector.
What you need to know about the Altman Z-score.
The Altman Z-score adds together the result of five ratios, all calculated using publicly-available company information. Those ratios are:
- working capital divided by total assets multiplied by 1.2
- retained earnings divided by total assets and multiplied by 1.4
- earnings before interest and tax divided by total assets and multiplied by 3.3
- market capitalisation divided by total liabilities and multiplied by 0.6
- sales divided by total assets and multiplied by one
A score of 1.8 or less signals that the company is likely to become insolvent, while a score of three or above suggests it is not.
Find out more about the Altman Z-score.
The Altman Z-score is used as a predictor of insolvency. Learn more about insolvency here.