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Computerized Investing > First Quarter 2012

The Altman Z-Score

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by CI Staff

The biggest calamity that can befall equity investors is corporate bankruptcy, which wipes out the equity of a firm and knocks the stock’s investment value down to zero. Fundamental analysis attempts to gauge the financial strength of a company using a variety of metrics, many of which we have highlighted in this column. Used in conjunction with one another, financial ratios can often help us to paint a picture of the long-term viability of a firm. However, this is not always the case; sometimes the ratios of a firm give conflicting views. To help eliminate this confusion, NYU professor Edward Altman developed the Z-Score in the late 1960s to explicitly address the likelihood that a company would go bankrupt. In this installment of Fundamental Focus, we discuss how to calculate a company’s Z-Score.

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