Altman Z-Score

The Altman Z-Score is a financial metric used to assess the likelihood of a company going bankrupt within the next two years. Developed by economist Edward Altman in 1968, the Z-Score combines five key financial ratios, each weighted according to its significance, to produce a single score. This score helps investors and analysts evaluate a company's financial health and predict the risk of insolvency. The Z-Score ranges from a high of 3.0 or above, indicating a low risk of bankruptcy, to below 1.8, which suggests a high risk of financial distress.

Example

A manufacturing company with a Z-Score of 2.5 would be considered at moderate risk of financial distress, prompting further investigation by investors or creditors.