Z-Score Exercise
Navigate to one of the following website(s) and calculate the Z-score for a publicly traded firm.
●http://www.investingcalculator.org/investment/altman-z-score-calculator/
The 5 financial ratios in the Altman Z-Score and their respective weight factor are as follows: RATIO WEIGHTAGE
A EBIT/Total Assets x XXXXXXXXXXto +8.0
B Net Sales /Total Assets x XXXXXXXXXXto +8.0
C Market Value of Equity / Total Liabilities x XXXXXXXXXXto +8.0 D Working Capital/Total Assets x XXXXXXXXXXto +8.0
E Retained Earnings /Total Assets x1.4 -4 to +8.0
These ratios are multiplied by the weightage as above, and the results are added together. Z-Score = A x 3.3 + B x XXXXXXXXXXC x 0.6 + D x 1.2 + E x 1.4
The Interpretation of Z Score:
Z-SCORE ABOVE 3.0 -The company is safe based on these financial figures only.
Z-SCORE BETWEEN 2.7 and XXXXXXXXXXOn Alert. This zone is an area where one should exercise caution.
Z-SCORE BETWEEN 1.8 and 2.7 - Good chances of the company going bankrupt within 2 years of operations from the date of financial figures given.
Z-SCORE BELOW 1.80- Probability of Financial embarrassment is very high.
June