http://www.grahaminvestor.

com/articles/quantitative-tools/the-altman-z-score/

The results indicated that, if the Altman Z-Score is close to or below 3, it is wise to do some serious due diligence before considering investing. The Z-score results usually have the following quot;Zonesquot; of interpretation:

Z Score below 2.99 -Safe Zones. The company is considered Safe based on the financial figures only. 1.8 lt; Z lt; 2.99 -Grey Zones. There is a good chance of the company going bankrupt within the next 2 years of operations. Z below 1.80 -Distress Zones. The score indicates a high probability of distress within this time period.

The Z-score has subsequently been re-estimated based on other datasets for private manufacturing companies, as well as non-manufacturing / service companies.

Read more: http://articles.businessinsider.com/2011-04-13/markets/30063024_1_ratios-morganstanley-sheets#ixzz2S6ZxW36x

calculations are not recommended for financial companies. This bankruptcy calculation model is important for the companys investors and creditors (also owners), as it provides information on how close the company is to a possible bankruptcy.

Norms and limitations

The value of Z-score, calculated for public companies usually has the following intervals: Above 2.99 means that the possibility of companys bankruptcy is very low, so the company is considered safe. This interval is known as the safe zone. A value between 1.8 and 2.99 indicates the possibility of the company going bankrupt within the next two years. This interval is known as the grey zone. If the value is below 1.8 it means that the possibility of company going bankrupt is high, therefore the company is considered unstable and dangerous. This interval is known as the distress zone. In general if the value of Altman Z-Score goes down to 3 or below, it would be smart to consider paying serious attention to the companys condition.

Formula

Assets (Total assets) - a balance sheet item, representing what a company owns. Debt (total debt, total liabilities) is calculated by adding together the long term debt with the short term debt. These two measures can be easily located on the balance sheet. Net sales (revenues, sales) can be described as sales, deducting returns and discount for customers. Stock price shows the total price of all shares outstanding at the current market price. Working capital (net working capital, NWC) is calculated by deducting current liabilities (current debts) from current assets. Retained earnings is a measure that shows a part of net income, which wasnt paid out to the shareholders as a form of dividends. Earnings before interest and taxes (EBIT) equal net income, plus interest expense, plus taxes. Z score bankruptcy model: Z = 1.2T1 + 1.4T2 + 3.3T3 + 0.6T4 + .999T5 Zones of Discrimination: Z > 2.99 -Safe Zones 1.81 < Z < 2.99 -Grey Zones Z < 1.81 -Distress Zones