Altman Z Score

This measure was devised to test for possible bankruptcy or financial distress of a company. It was developed by Professor Edward Altman in the 1960's. The score is built of five key ratios (shown below), each of which is weighted for its relative importance before being combined into a single score.

The score has been shown to be about 70% effective in predicting bankruptcy for non-financial firms, and Altman himself recognised that it is inappropriate for financial firms where, for example, a banks debt load is very high as a result of the banks lending function.

The five key ratios of the Altman Z Score are as follows;

Working capital / Total assets
Retained earnings / Total assets
EBIT / Total assets
Net sales / Total assets
Market Value of equity / Total Liabilities

What to do if you need more help

If you need more help with your specific commercial loan, mortgage or insurance requirement please speak to a professional financial adviser.

We hope you found this information useful.

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