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+
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3.3 x (Net Earnings / Total Assets)
0.999 x (Net Sales / Total Assets)
0.6 x [(Common Stock Value + Preferred Stock Value) / Total Liabilities]
1.2 x [(Current Assets - Current Liabilities) / (Total Assets)]
1.4 x (Net Sales / Total Assets)
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= Altman's Z-Score
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Explanation of Altman's Z-Score:
Altman's Z-Score formula weighs five ratios then adds them together to
come up with a bankruptcy prediction estimate for a company. This
estimate of bankruptcy for publicly-held companies depends on the resulting
score of Altman's Z-Score formula, which the score is divided into four
categories:
| Less than 1.8: |
Bankruptcy risk is high |
| Between 1.8 and 2.7: |
Bankruptcy risk is fair |
| Between 2.7 and 3.0: |
Bankruptcy risk is possible, but not likely in the near-future |
| Higher than 3.0: |
Bankruptcy risk is low |
Importance of Altman's Z-Score:
A score greater than 3.0, or an increasing Altman's Z-Score is usually a
positive sign. The higher the score, the better the company's chances of
avoiding bankruptcy, but this score should be checked against other companies
and industry standards. It should be noted that large economic events, like an
entire industry slowdown, would render this scoring method less accurate.
The individual components of this formula should be monitored, as they are the
key to understanding how the score was calculated.
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