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Altman Z-Score Case Study in Detail

The Altman Z-score is the output of a credit-strength test that gauges a publicly traded manufacturing company’s likelihood of bankruptcy. The Altman Z-score is based on five financial ratios that can calculate from data found on a company’s annual 10-K report. It uses profitability, leverage, liquidity, solvency, and activity to predict whether a company has a high probability of being insolvent.

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Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

Where:

A = working capital / total assets

B = retained earnings / total assets

C = earnings before interest and tax / total assets

D = market value of equity / total liabilities

E = sales / total assets

A score below 1.8 means it’s likely the company is headed for bankruptcy, while companies with scores above 3 are not likely to go bankrupt. Investors can use Altman Z-scores to determine whether they should buy or sell a stock if they’re concerned about the company’s underlying financial strength. Investors may consider purchasing a stock if its Altman Z-Score value is closer to 3 and selling or shorting a stock if the value is closer to 1.8.

Q: Calculate Altman Z-Score for firm XYZ and State insolvency Probability of Firm:

EBIT: ₹500000,  Total Assets: 2000000

Total Liabilities: 1000000,  Retained Earnings: 1000000

Market Value of Equity: 3000000,   Working Capital: 500000

Solution: Solved in above Video with the description

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