Most entrepreneurs would wish to know whether their companies are financially sound or about to file for bankruptcy. The Altman model can give them a hint. 

 

The Altman model, based upon financial ratios, is designed to estimate the company´s future financial standing, namely delivering a timely prediction of a financial shortcoming or an eventual bankruptcy. The model was published in 1968 by Edward Altman, and became one of the fundamental models for the company´s financial analysis. 

The Altman model for corporations is defined as follows: 

 **Z = 1,2a + 1,4b + 3,3c + 0,6d + 1,0e**

 **a** = working capital / total assets               

 **b** = retained earnings / total assets; retained earnings =  after-tax earnings  -  dividends

 **c** = earnings before interest and taxes / total assets 

 **d** = market value of equity / book value of total liabilities

 **e** = sales / total sales  

Scoring for corporations: 

 **Z   >   2,99**              financially safe company

 **Z   =   1,81  -  2,99**   company with nondescript financial standing, grey zone

 **Z   <   1,81**              company in distress, heading for bankruptcy 

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