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What is Altman Z- SCORE?

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Posted by : NIFM
8 May, 2013, 5:35 PM
What is Altman Z SCORE? Edward I. Altman published Altman Z score formula in 1968 for predicting bankruptcy of banks. The formula is used to predict the probability that a firm will go into bankruptcy within two years time horizon. Z-scores are used to predict corporate defaults and an easy-to-calculate control measure for the financial distress status of companies. Objective of Altman Z score ·         To determine the credit worthiness of a bank or financial institution ·         To determine the risk associates with issuing any further loan ·         To predict the chance of bankruptcy ·         To know about the financial status of the organization ·         To evaluate the business model and present strategy of the organization. The Z score formula is (Z-Score = A (1.2) + B(1.4) + C(3.3) + D(0.6) + E(.99)) Where:      Objective Multiply A Working Capital/Total Assets Measure the liquidity of the company’s asset base 1.2 B Retained Earnings/Total Assets Measure cumulative profitability relative to firm size 1.4 C Earnings before Interest & Tax/Total Assets Measure how efficiently the company uses its assets to generate earnings from operations 3.3 D Market Value of Equity/Total Liabilities Consideration of the market’s view of the company relative to its liability .6 E Sales/Total Assets  Measure asset turnover .99   How to interpret Z score Z score status Z-SCORE ABOVE 3.0 Safe zone Z-SCORE BETWEEN 2.7 and 2.99 On alert Z-SCORE BETWEEN 1.8 and 2.7 Good chance of bankruptcy Z-SCORE BELOW 1.80 Probability of Financial Catastrophe is Very High                      

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