ZScore (Altman)Knowledge Center 
Predicting bankruptcy. Explanation of ZScore formula of Altman. ('68) 
The
ZScore formula for predicting bankruptcy of Edward Altman is a multivariate
formula for a measurement of the financial health of a company and a powerful
tool to diagnose the probability that a company will go bankrupt within a
2 year period. Studies measuring the effectiveness of the ZScore have shown
the model is often accurate in predicting bankruptcy (72%80% reliability). The ZScore 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.
Composition of the ZScoreThe ZScore bankruptcy predictor combines five common business ratios, using a weighting system calculated by Altman. Thus it determines the likelihood that a company will go bankrupt. It was derived based on data from manufacturing firms, but has since proven to be also effective (with some modifications) in determining the risk that a services firm will go bankrupt. Analyzing the results of the ZScore methodHow should the results be judged? It depends:
For the ZScore 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 ZScore model with these other liquidity measurement ratios: Current Ratio  Quick Ratio  Cash Ratio  RAROC Return to Management Hub: Finance & Investing 

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