The Altman Z-Score is a financial metric created by Edward Altman in 1968 as a means of predicting the likelihood of a company going bankrupt. It is a combination of multiple financial ratios that are weighted based on their predictive power. The Z-Score is widely used by analysts and investors to assess the financial health and bankruptcy risk of a company.

The formula for the Altman Z-Score includes several financial ratios:

\[ Z = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E \]

Where:
– \(A\) is the working capital / total assets ratio.
– \(B\) is the retained earnings / total assets ratio.
– \(C\) is the earnings before interest and taxes (EBIT) / total assets ratio.
– \(D\) is the market value of equity / total liabilities ratio.
– \(E\) is the sales / total assets ratio.

The Altman Z-Score categorizes companies into three groups:

1. **Safe Zone (Z-Score > 2.99):** Companies in this range are considered financially healthy and are less likely to face bankruptcy in the near future.

2. **Grey Zone (1.81 < Z-Score < 2.99):** Companies in this range fall into a grey area, and caution is advised. The Z-Score may not provide a clear indication of financial health, and further analysis is recommended. 3. **Distress Zone (Z-Score < 1.81):** Companies in this range are deemed to be in financial distress, and there is a higher likelihood of bankruptcy. The lower the Z-Score, the higher the probability of financial difficulties. It's important to note the following considerations when using the Altman Z-Score: - The Z-Score was initially designed for manufacturing companies but has since been applied to various industries with some modifications. - The Z-Score is a statistical model, and while it can be a useful tool, it is not foolproof. Other factors, such as changes in the industry, management decisions, and macroeconomic conditions, can also influence a company's financial health. - The Z-Score should be used as one of several tools in financial analysis rather than as the sole determinant of investment decisions. Investors and analysts should interpret the Altman Z-Score in the context of the specific industry and company conditions. Additionally, it's important to consider other fundamental and qualitative factors when assessing the overall financial health of a company.