The formula as below:
Z = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E
A = Working Capital / Total Assets (WC/TA)
A measure of the net liquid assets of the firm relative to the total capitalization.
B = Retained Earnings / Total Assets (RE/TA)
Retained earnings is the account whick reports the total amount of reinvested earnings and/or losses of a firm over its entire life. In addition, the RE/TA ratio measures the leverage of a firm.
C = Earning Before Interest and Taxes / Total Assets (EBIT/TA)
A measure of the true productivity of the firm's assets, independent of any tax or leverage factors.
D = Market Value of Equity / Total Liabilities (MVE/TL)
Shows how much the firm's assets can decline in value before the liabilities exceed the assets and the firm becomes insolvent.
E = Sales / Total Assets (S/TA)
The capital-turnover ratio is a standard financial ratio illustrating the sales generating ability of the firm's assets. It is one measure of management's capacity in dealing with competitive conditions.
Z > 3 : Safe Zone
1.8 < Z < 3 : Grey Zone
Z < 1.8 : Distress Zone
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