Z-Score

Indicates the probability of a company going bankrupt or having significant financial distress. Created by NYU professor Edward Altman, the original Z-Score model was built in 1968 for manufacturers. The Z double prime model was created for companies in other industrial sectors like retail, wholesale, service, energy and public utilities. The formula for the Z double prime score is 3.25 + [6.56 × (working capital ÷ total assets)] + [3.26 × (retained earnings ÷ total assets)] + [6.72 × (earnings before interest and taxes ÷ total assets)] + [1.05 × (book value of equity ÷ book value of total liabilities)]. The ranges for a firm’s Z double prime score are: Below 1.8 indicates a firm is headed for financial distress; above 3.0 indicates a firm is unlikely to enter bankruptcy; between 1.8 and 3.0 is a statistical “gray area” (errors were made).