Altman Z-score formula for predicting Bankruptcy..

1. prepare by.
RAVI DHIMAN
SUBASH
GAURAV
ANKUSH
ANKUR

2. The Z-score formula for predicting bankruptcy
was published in 1968 by EDWARD ALTMAN ,
who was , at the time ,an Assistant Professor of
Finance at NewYork University.
Z score refers to how many standard deviations a
particular data point is from the mean of the data.
Z –scores are useful when comparing data points
from different sets of data

3. A Z score of company below 1.8 is probably
headed to bankruptcy
A z score of 1.8 to 3 of a company might headed
to bankruptcy.
Companies with z score above 3 are financial
stable

4. The formula is
1.2A+1.4B+3.3C+0.6D+1.0E
Where, A. represents Working capital / total
assets ratio
B. represents retained earning / total assets ratio
C .represents EBIT / total assets ratio
D . represents the market value of equity / total
liabilities
E. Represents sales / total assets ratio
ALTMAN Z SCORE FORMULA

5. To calculate Z score , the first step to identify the seven
items listed on the Balance Sheet and Income Statement
Used in the claculations
BALANCE SHEET INCOME STATEMENT
1 .Working capital 5. Sales
2.Total assets 6.EBIT
3.Total liabilities 7. Retained earning
4.Market capitalization

6. ALTMAN Z –SCORE CALCULATION

7. Investors use z score to determine if a company is
approaching bankruptcy or whether they should buy
or sell a particular stock
However , Z score do not work for new companies ,As
their low earning will always render a low z score
In Addition , Z score does not directly account for
cash flow
A company may have high Z Score , but be unable to
pay its debt , and thus have to declare bankruptcy.

8. Thank you