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Trading and Investment Terminology

Altman Z-Score

The Altman Z-score can be defined as the yield of a credit-quality test that checks a publicly-traded manufacturing organization's probability of bankruptcy.

The Altman Z-score depends on 5 financial ratios that can compute from data information found on an organization's yearly 10-K report.

It utilizes profitability, leverage, liquidity, solvency, and activity to foresee whether an organization has a high likelihood of going bankrupt.

A score underneath 1.8 implies it's presumable the organization is headed for insolvency, while organizations with scores over 3 are not prone to become insolvent.

Investors can utilize Altman Z-scores to decide if they should purchase or sell a security if they're worried about the organization's fundamental quality.

Investors may consider buying a security if its Altman Z-Score value is near 3 and selling or shorting a security if the value is near 1.8.

Altman Z-score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

A = working capital / total assets

B = retained earnings / total assets

C = income before interest and taxing / total assets

D = market value of stock / total liabilities

E = sales / total assets

In the year 2007, the credit scores of some asset-related stocks had been evaluated higher than they ought to have been. The Altman Z-score showed that the organizations' dangers were expanding significantly and may have been heading for insolvency.