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Altman Z-Score Analysis - Background

The Altman Z-Score is the world standard for measuring the overall health of any business.

For years, researchers have attempted to identify a ratio or set of ratios that provided an early warning of a business going bankrupt. In the early part of this century, for example, some researchers concluded that the best ratio to calculate and examine was Net Working Capital to Total Assets.

A few years later, someone discovered that the Return on Net Worth and Net Worth to Total Debt ratios were best. Later on, other researchers successfully focused on the Current Ratio, Net Worth to Total Debt, Times Interest Earned, and Net Profit-to-Sales ratios.

Finally, in the 1960s, Edward Altman combined 5 ratios into what has become known as the Altman Z-Score, the best-known predictor of bankruptcy. What the Altman Z-Score does is calculate and the combine 5 financial ratios, assigning each a different weighting.

If the total Z-Score is 1.81 or less, there is a very good chance the business could go bankrupt in the coming year. If the total Z-Score is 3.00 or better there is little danger of bankruptcy.

               

Your Firm's Financial Health Using Previous Methods

               
     

1997

1996

1995

1994

TREND

Net Working Capital To Total Assets

0.26

0.24

0.26

0.24

0.26

Return on Net Worth  

15.02%

22.57%

6.82%

14.15%

17.39%

Net Worth to Total Debt  

56.76%

52.76%

44.88%

44.81%

56.36%

Current Ratio    

1.75

1.67

1.89

1.73

1.74

Times Interest Earned  

2.40

3.00

0.78

2.46

2.47

Net Profit-to-Sales  

2.63%

3.29%

0.85%

1.79%

2.89%

               
               

Your Firm's Financial Health Using The Z-Score

               
     

1997

1996

1995

1994

TREND

Z-Score    

5.43

5.70

5.47

5.36

5.55

               

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