What is the z-score for financial distress?
A Z-score that is lower than 1.8 means that the company is in financial distress and with a high probability of going bankrupt. On the other hand, a score of 3 and above means that the company is in a safe zone and is unlikely to file for bankruptcy.
| Z-Score | Interpretation |
|---|---|
| > 2.99 | Safe Zone – Low Likelihood of Bankruptcy |
| 1.81 to 2.99 | Grey Zone – Moderate Risk of Bankruptcy |
| < 1.81 | Distress Zone – High Likelihood of Bankruptcy |
The formula takes into account profitability, leverage, liquidity, solvency, and activity ratios. An Altman Z-score close to 0 suggests a company might be headed for bankruptcy, while a score closer to 3 suggests a company is in solid financial positioning.
A Z-Score is a statistical measurement of a score's relationship to the mean in a group of scores. A Z-score can reveal to a trader if a value is typical for a specified data set or if it is atypical. In general, a Z-score of -3.0 to 3.0 suggests that a stock is trading within three standard deviations of its mean.
Standard Z-score Chart
A Z-score table shows the percentage of values (usually a decimal figure) to the left of a given Z-score on a standard normal distribution. For negative Z-scores, look up the positive version on this table, and subtract it from 1.
- 95% Two-Sided Z-Score: 1.96. One-Sided Z-Score: 1.65.
- 99% Two-Sided Z-Score: 2.58. One-Sided Z-Score: 2.33.
- 90% Two-Sided Z-Score: 1.64. One-Sided Z-Score: 1.28.
- A Z-Score is a metric that measures the potential bankruptcy or insolvency of a company. ...
- The Z-score is found by subtracting the mean from the total score and then dividing that by the standard deviation. ...
- Z–score = Score−Mean / Standard Deviation.
- A good Z-score for a company is anything above 3.
Z-scores range from -3 standard deviations (which would fall to the far left of the normal distribution curve) up to +3 standard deviations (which would fall to the far right of the normal distribution curve).
z score of 2.5 means the actual test score is 2.5 standard deviations above the mean, or 79 + 2.5 * 6 = 94.
The standard score (more commonly referred to as a z-score) is a very useful statistic because it (a) allows us to calculate the probability of a score occurring within our normal distribution and (b) enables us to compare two scores that are from different normal distributions.
Is a high z-score good or bad?
The answer: A z-score simply tells us how many standard deviations a given value is from the mean, so it can't be “good” or “bad.”
A high z -score means a very low probability of data above this z -score. For example, the figure below shows the probability of z -score above 2.6 . Probability for this is 0.47% , which is less than half-percent. Note that if z -score rises further, area under the curve fall and probability reduces further.
Z-score compares the buffer of a country's commercial banking system (capitalization and returns) with the volatility of those returns. It captures the probability of default of a country's banking system.
Z-scores are measured in standard deviation units.
For example, a Z-score of 1.2 shows that your observed value is 1.2 standard deviations from the mean. A Z-score of 2.5 means your observed value is 2.5 standard deviations from the mean and so on.
| Input | Financial Ratio | 2000 |
|---|---|---|
| X1 | Working capital/ Total Assets | -0.08 |
| X2 | Retained earnings/Total Assets | 0.03 |
| X3 | EBIT/Total Assets | 0.08 |
| X4 | Market Value/Total Liabilities | 1.20 |
Answer and Explanation:
Z-scores can take on any value between to , but when considering the empirical rule it is highly unlikely that they will go beyond -3 and 3. This is a common "minimum" and "maximum" used when considering the range of possible values in a distribution.
Generally, a value with a Z greater than 2 is extreme because that makes the value greater than the 95th percentile. A value greater than a Z-score of 3 is extreme, but it fits the general rule that a Z-value greater than 2 is extreme.
Z score interpretation
The higher the score, the lower the probability of failure. A score above 2.9 is very good (2.6 for non-manufacturing) and shows a low probability of failure. A score below 1.23, or 1.1 for non-manufacturing, conversely, signifies an exceptionally high likelihood of failure.
As a rule, z-scores above 2.0 (or below –2.0) are considered “unusual” values. According to the 68-95-99.7 Rule, in a normal population such scores would occur less than 5% of the time. Z-scores between -2.0 and 2.0 are considered “ordinary” values and these represent 95% of the values.
Moody's has a Altman Z-Score of 6.18, indicating it is in Safe Zones. This implies the Altman Z-Score is strong. The zones of discrimination were as such: When Altman Z-Score <= 1.8, it is in Distress Zones.
What is the normal range of the z-score?
A raw score as a Z-score can also be called a standard score and it can be placed on a normal distribution curve. Z-scores range from -3 standard deviations up to +3 standards. A Z-score can help us in determining the difference or the distance between a value and the mean value.
| Input | Financial Ratio | 2000 |
|---|---|---|
| X1 | Working capital/ Total Assets | -0.08 |
| X2 | Retained earnings/Total Assets | 0.03 |
| X3 | EBIT/Total Assets | 0.08 |
| X4 | Market Value/Total Liabilities | 1.20 |
Z-score is calculated by taking return on asset (ROA) and summing it up with equity to asset ratio then dividing it by the standard deviation of ROA.
