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The Altman Z-score, simply explained
A test created in 1968 to estimate bankruptcy risk, and the Z'' version Scorvest uses.
Where does it come from?
Edward Altman, a New York University professor, combined a few balance sheet and earnings ratios to separate companies that went bankrupt from those that survived. The Z'' version also applies to non-manufacturers and companies outside the US.
How to read it
Above 2.6: safe zone. Between 1.1 and 2.6: grey zone. Below 1.1: distress zone. It is a statistical signal, not a prediction: it flags cases worth a close look.