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The Altman Z-Score is a financial metric used to assess the likelihood of a company going bankrupt within the next two years. Developed by economist Edward Altman in 1968, the Z-Score combines five key financial ratios, each weighted according to its significance, to produce a single score. This score helps investors and analysts evaluate a company's financial health and predict the risk of insolvency. The Z-Score ranges from a high of 3.0 or above, indicating a low risk of bankruptcy, to below 1.8, which suggests a high risk of financial distress.
A manufacturing company with a Z-Score of 2.5 would be considered at moderate risk of financial distress, prompting further investigation by investors or creditors.
• A financial metric predicting the likelihood of bankruptcy.
• Combines five key financial ratios into a single score.
• Scores below 1.8 indicate high risk; scores above 3.0 suggest low risk.
It measures the likelihood of a company going bankrupt within the next two years based on its financial health.
It is calculated using a formula that combines five financial ratios, each weighted according to its significance in predicting bankruptcy.
A low Z-Score (below 1.8) indicates a high risk of bankruptcy, suggesting the company may be in financial distress.
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