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Altman-Z Score

The Altman-Z score was created by NYU Stern Finance Professor Edward Altman in 1967. The Altman Z-score is a formula that gauges the credit-strength of a company and the likelihood of it filing for bankruptcy. The Altman Z-score is based on five financial ratios that can be calculated from data found on a company’s annual 10K report.

The Altman Z-score is calculated as follows:

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1.2(A) + 1.4(B) + 3.3(C) + 0.6(D) + 1.0(E)

A = working capital / total assets
B = retained earnings / total assets
C = earnings before interest and tax / total assets
D = market value of equity / total liabilities
E = sales / total assets

A score below 1.8 means the company could be headed for bankruptcy, while companies with scores above 3 are not likely to go bankrupt.

Investors use the Altman Z-score to determine a company’s financial health.

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