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Intro to stocks

Z-Score Liquidity

Developed in the late 1960's by Edward I. Altman, the Z-Score is a quick method of determining the solvency or financial well-being of a company. While it will not protect you from market volatility, it can be a powerful tool to alert you to current and potential financial trouble a company may be facing. Basically, the Z-Score is a weighted sum of a number of financial ratios designed to determine two important factors: liquidity and performance for every $1.00 invested in a company. By extracting the figures listed below you can determine with a good degree of accuracy (approximately 90%) whether or not there is a strong possibility the company in question is likely to go bankrupt over the next year.

Z-Score Less than 1.8 Z-Score Greater than 3.0
High Probability of Financial Failure Not Likely in any Financial Danger

Listed below are the figures necessary for you to calculate a company's Z-Score and where you will find them on their annual financial statements.

Figure Found On?
Total Sales Income Statement
Retained Earnings Statement of Retained Earnings
Operating Income (Earnings before interest and taxes) Income Statement
Working Capital (Current Assets - Current Liabilities) Balance Sheet
Total Assets Balance Sheet
Total Liabilities Balance Sheet
Market Value Common and Preferred Shares (# of shares * current price) Share Prices: Quote Service
Shares Outstanding: Annual Report

Use the figures above to calculate your Z-score as follows:

Working Capital / Total Assets * 1.2
+ Retained Earnings / Total Assets * 1.4
+ Operating Income / Total Assets * 3.3
+ Stock Value / Total Liabilities * 0.6
+ Total Sales / Total Assets


Valuation Methods:

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