Altman's Z-Score for Bankruptcy

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Altman's Z-Score for Bankruptcy
©2009 OS Financial Trading System

RTFTS Client Program : Models
From the Analytical Support (bottom LHS of the screen) the model relevant to assessing the intrinsic value of a distressed firm are the Merton Model and the Altman Model. (see bottom of the dropdown)

Altman's Z-score Model for Bankruptcy
This is a distress prediction model which is also used for credit scoring. The model is defined as follows:
Z = 0.717x1 + 0.847x2 + 3.11x3 + 0.420x4 + 0.998x5
Where:
x1 = Net working capital/Total assets
x2 = Retained earnings/Total assets
x3 = EBIT/Total assets
x4 = Shareholders' equity/Total Liabilities
x5 = Sales/Total assets
The above variables can be expressed in either aggregate or per share values. In RTFTS the convention is to express on a per share basis.
Interpretation:
If a company's Z-score is less than 1.20 then bankruptcy may follow. In addition, if Z is between 1.20 and 2.90 then a flag is raised for the company.
Of course this is not meant to be blindly applied without considering other factors. For example, if the company is generating strong Free Cash Flows they may have a Z-score that lies in the raise a flag range without implying any issues. So in other words it is purely meant as a first pass flag that requires additional analysis.