Altman Z

Altman Z-Score = 1.2*T1 + 1.4*T2 + 3.3*T3 + 0.6*T4 + 1.0*T5 T1 = Working Capital / Total Assets This ratio measures liquid assets (which is what working capital denotes). The companies in trouble will usually experience shrinking liquidity. T2 = Retained Earnings / Total Assets This ratio calculates the overall profitability of the company. Reducing profitability is a warning sign. Also, high levels of retained earnings suggest that a company may have financed its assets through profits rather than borrowings. T3 = Earnings before Interest and Taxes / Total Assets This ratio shows how productive a company is in generating earnings, relative to its size. T4 = Market Capitalization / Total Liabilities This ratio suggests how far the company’s assets can decline before it becomes technically insolvent (i.e., its liabilities become higher than its assets). T5 = Sales / Total Assets This is the asset turnover ratio and is a measure of how effectively the company is using its assets to generate sales.

by Prashant