This Altman Z-Score calculator estimates the Altman’s Z score which predicts bankruptcy of a company by using few financial ratios and a multiple discriminant analysis statistical method. There is more information on this model below the form.
How does this Altman Z-Score calculator work?
This is a financial tool that can help in evaluating the likelihood of a company to go bankrupt based on the model developed in 1968 by Edward Altman. The model aims to predict bankruptcy of a business by considering few traditional financial ratios and the multiple discriminant analysis statistical method. In regard of the accuracy of this model it is considered that it is 90% accurate in forecasting a business default one year into the future and somewhere around 80% accurate in predicting a financial distress two years into the future.
The algorithm behind the Altman Z-score calculator is based on this formula:
Altman Z-Score = 1.2*FF1 + 1.4*FF2 + 3.3*FF3 + 0.6*FF4 + 1.0*FF5
Where the financial ratios are determined by using the balance sheet figures given:
FF1 = Working capital/Total assets
FF2 = Retained earnings/Total assets
FF3 = EBIT/Total assets
FF4 = Market value of equity/Total liabilities
FF5 = Sales value/Total assets
Interpretation of levels of the Altman’s Z-score
If Z-score => 3.0 then the company is considered ‘safe’ while it is highly unlikely for bankruptcy or any failure/financial catastrophe to occur.
If Z-score is between =>2.7 and < 3 then the company should stay on alert as this level should be handled with caution.
If Z-score is between =>1.8 and <2.7 then there are good chances for the company to go bankrupt within 2 years of business activity from the date the financial figures account for.
If Z-score is below 1.80 then there is a very high probability that the company faces financial catastrophe.
As it can be observed, as a general rulethe lower/higher the score is, the lower/higher the likelihood of bankruptcy.
Example of a calculation
In case of a company with the following balance sheet figures and see its status:
- total assets = $790,000
- working capital = $50,000
- Market value of equity = $120,000
- Retained earnings = $45,000
- Book value of debt = $75,000
- Sales value = $240,000
- EBIT value = $89,000
■ Altman Z-Score: 1.79
■ There is a very high probability that the company faces financial catastrophe.20 Feb, 2015 | 0 comments