Christian Maupetit 1

Altman's Bankruptcy Index

the formula

Z = 1.2x1 + 1.4x2 + 3.3x3 + 0.6x4 + 1.0x5

How To Calculate A Z-Score

http://www.investopedia.com/articles/fundamental/04/021104.asp

Christian Maupetit 2

Altman's Bankruptcy Index

the components

• x1 = working capital/total assets

• x2 = retained earnings/total assets

• x3 = earnings before interest & taxes/total assets

• x4 = book value of equity/total liabilities

• x5 = sales/total assets

Christian Maupetit 3

General index

• x1 = working capital/total assets

a measure of net liquid assets of firm relative to total

capitalization

Z = 1.2x1 + 1.4x2 + 3.3x3 + 0.6x4 + 1.0x5

Christian Maupetit 4

General index

• x2 = retained earnings/total assets

a measure of cumulative profitability over time

Z = 1.2x1 + 1.4x2 + 3.3x3 + 0.6x4 + 1.0x5

Christian Maupetit 5

General index

• x3 = earnings before interest & taxes /total assets

measures the profit-generating power of assets

Z = 1.2x1 + 1.4x2 + 3.3x3 + 0.6x4 + 1.0x5

Christian Maupetit 6

General index

• x4 = book value of equity/total liabilities

a measure of what size losses of a company can incur before

creating insolvency (negative net worth)

Z = 1.2x1 + 1.4x2 + 3.3x3 + 0.6x4 + 1.0x5

Christian Maupetit 7

General index

• x5 = sales/total assets

a measure of the revenue productivity of the firm’s assets

Z = 1.2x1 + 1.4x2 + 3.3x3 + 0.6x4 + 1.0x5

Christian Maupetit 8

General index

Index above 3 is safe,

between 1.8 and 3 is in the “gray zone”,

below 1.8 the firm is in the “bankruptcy

zone”

Christian Maupetit 9

General index

bankruptcy zone gray zone safe zone

1.8 3.0 0

Christian Maupetit 10

General index

Example : Company A

Financial statements :

- income statement

- balance sheet

Christian Maupetit 11

General index (FY)

x1 (2 823 022 -2 564 066)/ 8 247 188 = 3.14%

x2 3 878 988/8 247 188 = 47.03%

x3 1 155 809/ 8 247 188 = 14%

x4 2 472 869/5 774 319 = 42.83%

x5 8 086 794/8 247 188 = 98.06%

z = (0.03768+0.65842+0.462+0.25698+0.9806) = 2.395768

Z = 2.4

Christian Maupetit 12

General index

Example : the Company A

1.8 3.0 0

Christian Maupetit 13

General index (FY-1)

x1 (2 292 530 -1 692 362)/ 6 381 146 = 9.39%

x2 3 633 385/6 381146 = 56.93%

x3 1 068 343/6 381 146 = 16.74%

x4 2 338 551/4 042 595 = 57.84%

x5 7 046 738/6 381 146 = 110.4.%

z = (0.11268+0.79702+0.55242+0.34704+1.104) = 2.91316

Z = 2.9

Christian Maupetit 14

General index

Example : the Company A (FY-1)

1.8 3.0 0