Assessing corporate financial distress: conceptual framework of Altman's z-score model

The financial health plays a significant role in the successful functioning of a firm. Poor financial health threatens the very survival of the firm and leads to business failures. Financial ratios are a tool to determine the operational & financial efficiency of business undertakings. There exist a large number of ratios propounded by various authors. Altman developed a z-score model using ratios as its foundation. With the help of the Z- Score model, Altman could predict financial efficiency/Bankruptcy up to 2–3 years in advance. The following research paper describes in detail the studies carried out by Altman to predict business bankruptcy. Altman made regular changes to achieve the perfect equation which could predict bankruptcy. The following research paper summarises the research of Altman that have being made to develop the Altman Z score model. It can be safely said that Altman's Z score Model can be applied to modern economy to predict distress and bankruptcy one, two & three years in advance.