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. |
