1. What is Altman's Z Score Model?

Altman's Z Score is a financial model that measures a company's financial health and likelihood of bankruptcy. It combines multiple financial ratios into a single score to predict the probability of financial distress.

2. How Does the Calculator Work?

The calculator uses Altman's Z Score formula:

Where:

• \( A \) — Working Capital
• \( RE \) — Retained Earnings
• \( C \) — Earnings Before Interest and Taxes
• \( D \) — Market Value of Equity
• \( E \) — Total Sales

Explanation: The formula weights different financial metrics to provide a comprehensive assessment of a company's financial stability.

3. Importance of Z Score Calculation

Details: The Z Score is crucial for investors, creditors, and analysts to assess a company's financial health and bankruptcy risk. A lower score indicates higher financial distress risk.

4. Using the Calculator

Tips: Enter all financial values in dollars. Ensure all values are non-negative and represent accurate financial data for the period being analyzed.

5. Frequently Asked Questions (FAQ)

Q1: What does the Z Score indicate?
A: A Z Score below 1.8 suggests high bankruptcy risk, between 1.8-3.0 indicates gray area, and above 3.0 suggests low bankruptcy risk.

Q2: How accurate is the Z Score model?
A: The original model was about 72% accurate in predicting bankruptcy one year prior and about 80-90% accurate two years prior.

Q3: Can this model be used for all companies?
A: The original model was designed for manufacturing firms. Different versions exist for private companies and non-manufacturers.

Q4: What time period should the financial data cover?
A: Typically, the most recent fiscal year's financial data is used for calculation.

Q5: Are there limitations to this model?
A: The model may be less accurate for service companies, financial institutions, and in rapidly changing economic conditions.