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Altman Z-Score for public companies

Altman Z-Score (for public companies)

Description

Altman Z-Score is a mathematic (quantitative balance-sheet method) model used to evaluate the company’s probability of bankruptcy in the next two years. This model was created combining five different financial ratios, calculated using the accounting data of those companies that had already gone bankrupt in the past. This model does not calculate the exact probability of a company’s bankruptcy. It is more of a statistics – based model, developed in 1968, but is still the most widely used one. Data needed to calculate this ratio is collected from the balance sheet, income statement and stock market bulletin, and the cash flow statement.

Norms and limitations

The value of Z-score, calculated for public companies usually has the following intervals:

Above 2.99 means that the possibility of company’s bankruptcy is very low, so the company is considered safe. This interval is known as the “safe zone”.

A value between 1.8 and 2.99 indicates the possibility of the company going bankrupt within the next two years. This interval is known as the “grey zone”.

If the value is below 1.8 it means that the possibility of company going bankrupt is high, therefore the company is considered unstable and dangerous. This interval is known as the “distress zone”.

In general if the value of Altman Z-Score goes down to 3 or below, it would be smart to consider paying serious attention to the company’s condition.

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