powered by GlobeinvestorGold.com
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
Z-Score