DEFINITION of 'Altman ZScore'
The output of a creditstrength test that gauges a publicly traded manufacturing company's likelihood of bankruptcy. The Altman Zscore, is based on five financial ratios that can be calculated from data found on a company's annual 10K report. The Altman Zscore is calculated as follows:
ZScore = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E
Where:
A = Working Capital/Total Assets
B = Retained Earnings/Total Assets
C = Earnings Before Interest & Tax/Total Assets
D = Market Value of Equity/Total Liabilities
E = Sales/Total Assets
A score below 1.8 means the company is probably headed for bankruptcy, while companies with scores above 3.0 are not likely to go bankrupt. The lower/higher the score, the lower/higher the likelihood of bankruptcy.
VIDEO
BREAKING DOWN 'Altman ZScore'
NYU Stern Finance Professor, Edward Altman, developed the Altman Zscore formula in 1967. In 2012, he released an updated version called the Altman Zscore Plus, that can be used to evaluate both public and private companies, both manufacturing and nonmanufacturing companies and both U.S. and nonU.S. companies. Investors can use Altman Zscores to help determine whether they should buy or sell a particular stock if they're concerned about the underlying company's financial strength. The Altman Zscore Plus can be used to evaluate corporate credit risk.

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What does a ZScore tell a stock analyst about the health of a company?
The Altman Zscore measures a company's likelihood of bankruptcy by using five ratios that are assigned different weights ... Read Full Answer >> 
How is the Altman ZScore used in fundamental analysis?
The Altman Zscore is used in fundamental analysis to gauge the financial health of a company. It is used to assess a company's ... Read Full Answer >> 
How can an investor use the ZScore to compare investment options?
The Altman Zscore is a test that an investor uses to gauge the likelihood of a company going bankrupt. The Altman Zscore ... Read Full Answer >> 
What can working capital be used for?
Working capital is used to cover all of a company's shortterm expenses, including inventory, payments on shortterm debt ... Read Full Answer >> 
Does working capital include stock?
A certain portion of a company’s working capital is generally composed of earnings; however, current shortterm assets that ... Read Full Answer >> 
Does working capital include shortterm debt?
Shortterm debt is considered part of a company's current liabilities and is included in the calculation of working capital. ... Read Full Answer >>