Altman Z'' Score

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Definition

The Altman Z Score was originally designed for manufacturing firms in specific industries. For companies that are not manufacturing firms, the Z'' was created for non-manufacturing firms and emerging markets. Similar to the first Z Score, this model determines the likelihood of bankruptcy.

Z > 2.9 -“Safe” Zone
1.22 < Z < 2.9 -“Grey” Zone
Z < 1.22 -“Distress” Zone

Formula

Z’’ = 6.56 (X1) + 3.26 (X2) + 6.72(X3) + 1.05(X4)

X1 = (Current Assets - Current Liabilities) / Total Assets
X2 = Retained Earnings / Total Assets
X3 = EBIT / Total Assets
X4 = Book Value of Equity ** / Total Assets

** The usage of Book Value of Equity versus Market Value of Equity differs based on the source. Many online sources will use Market Value of Equity, but Altman's presentation (link below) specifics Book Value of Equity. The usage of Book Value of Equity versus that of Market Value of Equity will generally cause companies to have LOWER Z'' scores.

http://pages.stern.nyu.edu/~ealtman/zscorepresentation.pdf

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