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.
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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