Discuss/Define the basics of Altman’s Z-score

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The Altman’s Z-score is a model that is used to measure the probability of a company going bankrupt.The Altman’s Z-score takes into account five financial ratios that are made available in the financial statements of a publicly listed company to determine the probability of the said company going bankrupt.The Altman’s Z-score can be calculated using the formula 1.2A+1.4B+3.3C+0.6D+1.0E.In the stated formula A stands for Working capital / Total assets B stands for Retained Earnings /Total Assets,C Stands for EBIT(Earnings Before Interest and Tax)/Total Assets,D stands for the Market Value of Equity/Total liability E stands for Sales /Total Assets (referred to as asset turnover ratio.)An Altman's Z score of 3 indicates the company is financially stable.An Altman's Z score of 1.8 indicates a high probability of the firm going bankrupt.If the value returned by the model is between 1.8 and 3 it indicates the firm has a moderate chance of going bankrupt.

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