Formula to calculate Altman’s Z-Score:
z-score = 1.2 a + 1.4 b + 3.3 c + d + .6 f
a = working capital,
b = retained earnings,
c = operating income,
d = sales,
e = total assets,
f = net worth and
g = total debt
Altman z-score definition and explanation:
The Altman z-score is a bankruptcy prediction calculation.
The z-score measures the probability of insolvency (inability to pay debts as they become due).
1.8 or less indicates a very high probability of insolvency.
1.8 to 2.7 indicates a high probability of insolvency.
2.7 to 3.0 indicates possible insolvency.
3.0 or higher indicates that insolvency is not likely.
The Altman z – score is included in the financial statement ratio analysis spreadsheets highlighted in the left column, which provide formulas, definitions, calculation, charts and explanations of each ratio.