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The Altman Z-Score Analysis
Check your Z-Score: How's your Fiscal Fitness?
Routinely used by Stockbrokers trying to determine if a company is a good investment, Bankers to determine loan risk, and internally, by anyone who wants to take close look at his or her own company's financial health. 

Data Needed: (Easily found in your company's financial statements.)
• Earnings before taxes
• Total assets
• Net Sales
• Market Value of Equity
• Total Liabilities
• Working Capital
• Retained Earnings

The worksheet will indicate: The short-term potential for financial problems at your company.

The Expert: Edward I. Altman, Professor and Vice-Director of New York University's Salomon Center, Leonard N. Stern School of Business. Dr. Altman is known as the founding father of using statistical techniques to predict company failure. He developed the Z-Score analysis almost 30 years ago, and is the author of several books, including  The Z-Score Bankruptcy Model: Past, Present, and Future (New York: John Wiley & Sons, 1977), and Corporate Financial Distress and Bankruptcy, 2nd edition (New York: John Wiley & Sons, 1993).

The Analysis: The Z-score was developed from an analysis of 33 Chapter X-bankrupt manufacturing companies with average assets of $6.4 million, and, as controls, another 33 companies with assets between $1 million and $25 million.

Altman's Z-score calculates five ratios:
1. return on total assets,
2. sales to total assets,
3. equity to debt,
4. working capital to total assets, and
5. retained earnings to total assets.

These ratios are then multiplied by a predetermined weight factor, and the results are added together. The final number--the Z-score--yields a number between -4 and +8. Financially-sound companies show Z-scores above 2.99, while those scoring below 1.81 are in fiscal danger, maybe even heading toward bankruptcy. Scores that fall between these ends indicate potential trouble. In Altman's initial study of 33 bankrupt companies, Z-scores for 95 % of these companies pointed to trouble or imminent bankruptcy.

Although the numbers that go into calculating the Z-score (and a company's financial soundness) are sometimes influenced by external factors, it provides a good quick analysis of where your company stands compared to the competition, and a good tool for analyzing the ups and downs of your company's financial stability over time.

               
The Altman Z-Score Analysis - 5 Ratios
.
RATIO FORMULA WEIGHT FACTOR WEIGHTED RATIO
Return on Total Assets

Earnings Before Interest and Taxes
-----------------------------------------

Total Assets

x. 3.3 -4 to +8.0
Sales to Total Assets

Net Sales
-----------------------------------------

Total Assets

x 0.999 -4 to +8.0
Equity to Debt

Market Value of Equity
-----------------------------------------

Total Liabilities

x 0.6 -4 to +8.0
Working Capital to Total Assets

Working Capital
-----------------------------------------

Total Assets

x 1.2 -4 to +8.0
Retained Earnings to Total Assets Retained Earnings
-----------------------------------------

Total Assets
x1.4 -4 to +8.0
.

Your Z-Score is:

1997

1996

1995

1994

TREND

Z-Score

5.43

5.70

5.47

5.36

5.55

KEY:

Z-SCORE ABOVE 2.99--YOU'RE IN GOOD SHAPE
Z-SCORE BETWEEN 2.99 and 1.81--WARNING SIGNS
Z-SCORE BELOW 1.81--BIG TROUBLE--COULD BE HEADING TOWARD BANKRUPTCY

 

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