The Altman Z-Score is a statistical model used to predict the probability of bankruptcy within two years. The score is based on five financial ratios: working capital, retained earnings, earnings before interest and taxes, market value of equity, and total liabilities. A score above 3.0 indicates that a company is not likely to go bankrupt, while a score below 1.8 suggests that bankruptcy is a real possibility.
The Altman Z-Score is important because it can give investors an early warning sign that a company may be in trouble. By closely monitoring the score, investors can make decisions about whether or not to sell their shares before it’s too late.
While the Altman Z-Score is a useful tool, it’s important to remember that it is not perfect. There have been cases where companies with high scores have gone bankrupt, and vice versa. However, the Altman Z-Score is still a valuable tool for investors who want to make informed decisions about their portfolios.