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The 'Z' score on an alphabetical listing of ratios is termed the 'Bankruptcy Index' developed by one Edward I Altman. It is a formula used to predict a company's likelihood of going bankrupt.

The Z score is reputed to be more accurate as a firm nears bankruptcy. As a general rule 1.81 is very scarry while a score above 2.99 is comfortable.

Z=1.2(X1)+1.4(X2)+3.3(X3)=0.6(X4)=1.0(X5), WHEREBY

X1=(Working capital)= current assets - current liabilities / total assets

X2=Retained earnings / total assets

X3=EBIT / total assets

X4=(Market value of equity) = Market price per share x number of stocks issued / total debt

X5=Asset Turnover = Sales / Total Assets


Interesting little arrangement of leverage and liquidity ratios that also covers efficiency.

Pass this equation over one company over a number of years and interesting trends start to emerge.
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