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MENTAL MODEL · M8901

Altman Z-Score

Altman Z-Score
DecideHigh supportDecision Science
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Version 1.0.0 · Updated 2026-07-30

CORE DEFINITION

Z = 1.2×(working capital / total assets) + 1.4×(retained earnings / total assets) + 3.3×(earnings before interest and taxes / total assets) + 0.6×(market value of equity / total liabilities) + 1.0×(sales / total assets). Z > 2.99: safe zone; Z < 1.81: danger zone.

SCAFFOLDING EFFECT

psychology

Reduce cognitive load

Quantify bankruptcy risk. Provide a comprehensive indicator for quick screening of corporate financial health.

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Anchor fast decisions

Altman used multiple discriminant analysis to build a bankruptcy prediction model: Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5 (ratios of working capital, retained earnings, earnings, market value, and sales). A low Z indicates a high probability of bankruptcy. The mechanism is comprehensive early warning through financial ratios.

MINIMUM ACTION

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Source support: Explicit

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    en.wikipedia.orghttps://en.wikipedia.org/wiki/Altman_Z-scoreZH · Explicit
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