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Predicting Bankruptcy |
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Z-Score |
Summary of Altman's Z-score Model. Abstract |
Edward I. Altman, 1968 |
Z-S was developed in 1968 by
Dr. Edward I. Altman, Ph.D., a financial economist and professor at
New York University's Stern School of Business. The Z-S bankruptcy predictor combines five common business ratios, using a weighting system calculated by Altman to determine the likelihood of a company going bankrupt. It was derived based on data from manufacturing firms, but has since proven to be effective as well (with some modifications) in determining the risk a service firm will go bankrupt. How should the results be judged? It depends: - Original Z-SCORE [For Public Manufacturer] If the score is 3.0 or above - bankruptcy is not likely. If the Score is 1.8 or less - bankruptcy is likely. A score between 1.8 and 3.0 is the gray area. Probabilities of bankruptcy within the above ranges are 95% for one year and 70% within two years. Obviously, a higher score is desirable.
T I P : Here you can discuss and learn a lot more about Z-Score by Altman. For the Z-S Formula, see the figure on the right. Note the variations for public and private companies. Book: John B. Caouette, Edward I. Altman, Paul Narayanan - Managing Credit Risk Compare Z-Score to these liquidity measurement ratios: Current Ratio | Quick Ratio | Cash Ratio | RAROC |
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