How many co-efficients are there in the Altman Z Score Model?

Solution

The Z-score formula for predicting bankruptcy was published in 1968 by Edward I Altman   The original Z-score formula was as follows: Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5. X1 = working capital / total assets. Measures liquid assets in relation to the size of the company. X2 = retained earnings / total assets. Measures profitability that reflects the company's age and earning power. X3 = earnings before interest and taxes  /  total assets. Measures operating efficiency apart from tax and leveraging factors. It recognizes operating earnings as being important to long-term viability. X4 = market value of equity/book value of total liabilities. Adds market dimension that can show up security price fluctuation as a possible red flag. X5 =   sales /  total  assets. The standard measure for total asset turnover (varies greatly from industry to industry).