Modified Altman Z score
Altman’s original five-ratio model was designed for manufacturers, or sectors with high capital intensity, such as mining...
Altman's original five-ratio model (see Altman Z-score) was designed for manufacturers, or sectors with high capital intensity, such as mining.
The problem is it uses the sales/total assets ratio, which can skew the result in sectors that are not capital intensive. A low total assets figure brings this ratio, and the resulting Z score, down too far and can generate a number that suggests financial distress when there may be none. Low capital intensity sectors include many service sector firms where people, rather than physical assets, are the main source of added value.
A modification to the Z score removes this ratio altogether to leave the remaining four, then re-weights them, still giving the most importance to the first: EBIT to total assets, followed by working capital to total assets, retained earnings to total assets and market capitalisation to total liabilities. It is interpreted similarly to the original Z score. A result of 2.6 or higher is safe'; a score of one or less suggests big trouble.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
MoneyWeek is written by a team of experienced and award-winning journalists, plus expert columnists. As well as daily digital news and features, MoneyWeek also publishes a weekly magazine, covering investing and personal finance. From share tips, pensions, gold to practical investment tips - we provide a round-up to help you make money and keep it.
-
Inflation holds steady at 3.8% ahead of BoE meeting
The rate of inflation did not rise in August, but the Bank of England is still expected to keep interest rates on hold tomorrow
-
Thousands of savers with £250k pensions take cash over tax-free money and IHT fears
With a record £70 billion withdrawn from pensions in the year to March, experts are concerned savers are making knee-jerk decisions without advice that could affect their long term wealth