The Altman z-score formula used to predict the probability that a firm will go into bankruptcy within two years.
Formula:
Z = 1.2 x X1 + 1.4 x X2 + 3.3 x X3 + 0.6 x X4 + 1.0 x X5
where:
| Working Capital |
| Total Assets |
| (Current Assets - Current Liabilities) |
| Total Assets |
| Retained Earnings |
| Total Assets |
| Earnings before Interest and Taxes (EBIT) |
| Total Assets |
| Market Value Equity |
| Total Liabilities |
| [Market Value Per Share x Outstanding Shares (Diluted)] ÷ 1000 |
| Total Liabilities |
| Net Sales |
| Total Assets |
Conclusion:
Z < 1.81 = Distress zone
Z > 2.99 = Safe zone
1.81 < Z < 2.99 = Grey zone