Recently a prospect used the Altman Z score as a part of their evaluation of our company. The Altman Z score is an insolvency score and is a combination of 5 weighted financial ratios which determine the financial health of a company.

The 5 financial ratios in the Altman Z-Score and their respective weight factor is as follows:

A. EBIT/Total Assets
B. Net Sales /Total Assets
C. Market Value of Equity/Total Liabilities
D. Working Capital/Total Assets
E. Retained Earnings/Total Assets

These ratios are multiplied by the weightage as below, and the results are added together.

Z-Score = A x 3.3 + B x 0.99 + C x 0.6 + D x 1.2 + E x 1.4

The Interpretation of Z Score:

• Z-SCORE ABOVE 3.0 -The company is safe based on these financial figures only.
• Z-SCORE BETWEEN 2.7 and 2.99 - On Alert. This zone is an area where one should exercise caution.
• Z-SCORE BETWEEN 1.8 and 2.7 - Good chances of the company going bankrupt within 2 years of operations from the date of financial figures given.
• Z-SCORE BELOW 1.80- Probability of Financial embarassment is very high.

Our score was above 20, so we did well on this indicator.