Is your company solvent?
This particular calculation, most informed observers agree is an accurate guide to a company’s solvency.
In simple terms a Z-Score of 1.81 or below means you are probably headed for bankruptcy, while a score of 2.99 or higher means your company is sound, based on financial data.
A Z-Score above 3.0 is safe; 2.7-3.0 is a warning; 1.8 to 2.7 means there is a chance the company will go bankrupt within two years; and less than 1.8 means the company is severely distressed.
Calculating Altman Z-Score
In order to compute the Z-score you will need to gather the following information: Earnings before interest and taxes (EBIT), total assets, net sales, market value of equity, total liabilities, current assets, current liabilities, and retained earnings. All of that information will be found in the financial statements of a company.
The standard formula for Z-Score is:
- ((Earnings before Interest/Total Assets) x 3.3) +
- ((Net Sales/Total Assets) x .99) +
- ((Market Value of Equity/Total Assets) x 0.6) +
- ((Working Capital/Total Assets) x 1.2) +
- ((Retained Earnings/Total Assets) x 1.4).
The total of 1-5 above provides the Z-Score.