1. What is the Altman Z-Score?

The Altman Z-Score is a financial formula that measures a company's financial health and predicts the probability of bankruptcy. Developed by Edward Altman in 1968, it combines five different financial ratios to assess corporate financial stability.

2. How Does the Calculator Work?

The calculator uses the Altman Z-Score equation:

Where:

• \( A \) — Working Capital/Total Assets
• \( B \) — Retained Earnings/Total Assets
• \( C \) — EBIT/Total Assets
• \( D \) — Market Value Equity/Book Value Liabilities
• \( E \) — Sales/Total Assets

Explanation: The equation weights different financial ratios to provide a comprehensive measure of financial health, with higher scores indicating lower bankruptcy risk.

3. Importance of Z-Score Calculation

Details: The Z-Score is widely used by investors, creditors, and financial analysts to assess corporate financial stability, predict bankruptcy risk, and make informed investment and lending decisions.

4. Using the Calculator

Tips: Enter all five financial ratios as decimal values. All values must be non-negative. The calculator will compute the Z-Score based on the standard Altman formula.

5. Frequently Asked Questions (FAQ)

Q1: What do different Z-Score values indicate?
A: Z-Score above 3.0 indicates financial stability, between 1.8-3.0 is a gray area, and below 1.8 suggests high bankruptcy risk.

Q2: Is the Z-Score applicable to all companies?
A: While widely used, the original formula was designed for manufacturing firms. Different versions exist for private companies and non-manufacturers.

Q3: How often should Z-Score be calculated?
A: It's typically calculated quarterly or annually using the most recent financial statements to track financial health over time.

Q4: What are the limitations of the Z-Score?
A: It may be less accurate for new companies, service firms, or companies in rapidly changing industries. It also relies on accounting data which can be manipulated.

Q5: Can Z-Score predict exact bankruptcy timing?
A: No, it indicates probability of financial distress within 1-2 years but cannot predict exact timing of bankruptcy.