The Z-Score is a measure of a company's health and utilizes several key ratios for its formulation. The model was developed in the late 1960's by Edward I. Altman, professor of finance at New York University School of Business. The model incorporates five weighted financial ratios into the calculations of the Z-Score. Professor Altman continues to update the model's coefficients to reflect changing ways of conducting business. The coefficient values used in this SDS, Inc. Supplier Financial Analysis Notebook were published in 1993 in Professor Altman's book entitled "Corporate Financial Distress and Bankruptcy", 2nd edition Copyright 1993 by John Wiley & Sons, Inc. ISBN 0-471-55253-4. Prof. Altman has defined 5 variables that comprise the Z-score for public and private comapnies.

1.X1 Component of Z-Score is defined as (X1=Working Capital/Total Assets). The ratio of Working Capital to Total Assets is the Z-Score component which is considered to be a reasonable predictor of deepening trouble for a company. A company which experiences repeated operating losses generally will suffer a reduction in working capital relative to its total assets.

2.The X2 Component of Z-Score is defined as(X2=Retained Earnings/Total Assets). The ratio of Retained Earnings to Total Assets is a Z-Score component which provides information on the extent to which a company has been able to reinvest its earnings in itself. An older company will have had more time to accumulate earnings so this measurement tends to creates a positive bias towards older companies.

3.X3 Component of Z-Score is defined as (X3=Earnings Before Taxes + Interest/Total Assets). This ratio adjusts a company's earnings for varying income tax factors and makes adjustments for leveraging due to borrowings. These adjustments allow more effective measurements of the company's utilization of its assets.

4.The X4 Component of Z-Score is defined as (X4=Market Value of Equity/Total Liabilities). This ratio gives an indication of how much a company's assets can decline in value before debts may exceed assets. Equity consists of the market value of all outstanding common and preferred stock. For a private company the book value of equity is used for this ratio. This depends on the assumption that a private company records its assets at market value.

5.The X5 Component of Z-Score is defined as (X5=Net Sales/Total Assets). This ratio measures the ability of the company's assets to generate sales. This ratio is not included in the Z-Score of a private company.

The Z-Score model for Public industrial companies is: Z = 1.2 X1 + 1.4 X2 + 3.3 X3 + 0.6 X4 + 1.0X5. A healthy public company has a Z >2.99; it is in the grey zone if 1.81 < Z < 2.99; it is unhealthy if it has a Z <1.81

The Z-Score model for Private industrial companies is: Z = 6.56 X1 + 3.26 X2 + 6.72X3 + 1.05X4. A healthy private company has a Z >2.60; it is in the grey zone if 1.1 < Z < 2.59; it is unhealthy if it has a Z > 1.1.