Altmans Z Score model

Altmans Z, is an analysis bankruptcy model using commonly accepted cutoff criteria, may
provide a useful decision rule to predict financial distress in firms operating in a wide variety of
industries.
Zones of Discrimination:
Z>2.99 Safe Zone
1.8<Z<2.99 Grey Zone
Z<1.80 Distress Zone
Likely to go bankrupt in the next 2 years
Score below 1.80 means a company is in financial distress, and likely to declare bankruptcy

Altmans Z Score Example:

Case study: Bio Green Papers, Bangalore
Metric

Value

Current Assets

12,454,000,000

Current Liabilities

11,491,000,000

Total Assets

66,714,000,000

Retained Earnings

14,636,000,000

EBIT

5,524,000,000

Market Cap

52,960,000,000

Calculation:
The Z-Score is constructed as:
Z = 1.2X1 + 1.4X2 + 3.3X3 + .6X4 = 1.0X5,
where
X1 = working capital / total assets
X2 = retained earnings / total assets
X3 = earnings before earnings and taxes / total assets
X4 = market value of equity / book value of debt
X5 = sales / total assets.
Coefficient

Variable (Ratio)
(Current Assets-Current Liabilities)/Total
1.2 Assets
1.4 Retained Earnings/Total Assets
3.3 EBIT/Total Assets

0.6 Market Cap/BV Debt

0.999 Sales/Total Assets

Coefficient

Variable (Ratio)
1.2

0.014434751

1.4

0.219384237

3.3

0.082801211

0.6

2.938304483

0.999

0.605360194

Z=1.2(,014434551)+1.4(0.219384237)+3.3(0.082801211 )+.6 (2.938304483)+.999(0.605360194

)
Z=3.86
Interpretation: