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. |