ALTMAN Z-SCORE reliably predicts whether or not a company is likely to enter into bankruptcy within one or two years:
• If the Z-Score is 3.0 or above - bankruptcy is not likely.
• If the Z-Score is 1.8 or less - bankruptcy is likely.
• A Z-Score between 1.8 and 3.0 is the gray area, i.e., a high degree of caution should be used.
Probabilities of bankruptcy within the above ranges are 95% for one year and 70% within two years. A Z-Score between the two is the gray area. Obviously a higher Z-Score is desirable. It is best to assess each individual company's Z-Score against that of the industry. In low margin industries it is possible for Z-Scores to fall below the above. In such cases a trend comparison to the industry over consecutive time periods may be a better indicator. It should be remembered that a Z-Score is only as valid as the data from which it was derived i.e. if a company has altered or falsified their financial records/books, a Z-Score derived from those "cooked books" is of lesser use.
• If the Z-Score is 3.0 or above - bankruptcy is not likely.
• If the Z-Score is 1.8 or less - bankruptcy is likely.
• A Z-Score between 1.8 and 3.0 is the gray area, i.e., a high degree of caution should be used.
Probabilities of bankruptcy within the above ranges are 95% for one year and 70% within two years. A Z-Score between the two is the gray area. Obviously a higher Z-Score is desirable. It is best to assess each individual company's Z-Score against that of the industry. In low margin industries it is possible for Z-Scores to fall below the above. In such cases a trend comparison to the industry over consecutive time periods may be a better indicator. It should be remembered that a Z-Score is only as valid as the data from which it was derived i.e. if a company has altered or falsified their financial records/books, a Z-Score derived from those "cooked books" is of lesser use.
