Short-term Bankruptcy Prediction

A number of years ago, Professor Edward Altman of New York University developed an index (using discriminate analysis) which is helpful in predicting, in the short run, when a company is headed for bankruptcy.  This index is commonly referred to as the Z-score.

When the score range is 1.8 or below short-term insolvency is very high.
When the score range is 1.81 to 2.675 short-term insolvency is high.
When the score range is 2.676 to 2.99 short-term insolvency is possible.
When the score range is 3.0 or above short-term insolvency is unlikely.

Z-score = (.012a + .014b +.033c + .006d + .010e) times 100

Where,
a = 'working capital' divided by 'total assets'
b = 'retained earnings' divided by 'total assets'
c = 'earnings before interest and taxes' divided by 'total assets'
d = 'market value of common equity' divided by 'book value of total debt'
c = 'sales' divided by 'total assets'

 

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