
Have an account? Login here
BUSINESS FINANCIAL FITNESS
BFF Program
Gateway's BFF Blog
Facebook
Tweet
Linkedin
Plus Share
Please Register or Login
Financial Calculators, Quizzes & Tools
Customer Concentration Calculator
Z Score Calculator
Cash Conversion Cycle Calculator
Download a Business Budget Template
Download a Cash Flow Projections Template
← Back To Program Subjects
Z Score Calculator
Likelihood a company will declare bankruptcy
ZScore Definition:
A model that predicts the likelihood that a firm will go bankrupt. The model uses five financial ratios that combine in a specific way to produce a single number. This number, called the Z Score, is a general measure of corporate financial health.
Complete Article:
http://www.exceluser.com/reports/zscorebankruptcyprediction.htm
Components needed to calculate the Z Score:
The Z Score is calculated by multiplying each of several financial ratios by an appropriate coefficient and then summing the results. The ratios rely on the following financial measures.
Use balance sheet figures from the end of the reporting period for all Z Score calculations.
Working Capital ($) = Current Assets minus Current Liabilities.
(exclude commas or decimal values
)
Total Assets ($) = The total of all Assets of the Balance Sheet.
(exclude commas or decimal values)
Retained Earnings ($) = Found in the Equity section of the Balance Sheet.
(exclude commas or decimal values)
EBIT (Earnings Before Interest and Taxes) ($) = Net Income; add back any income tax expenses and subtract any income tax benefits; then add back any interest expenses. (Includes the income or loss from operations and from any unusual or extraordinary items but not the tax effects of these items)
(exclude commas or decimal values)
Market Value ($) = The number of shares of common and preferred stock outstanding times the price per share, compared.
(exclude commas or decimal values)
Net Worth; Shareholders' Equity; or Equity ($) = Total Assets minus Total Liabilities.
(exclude commas or decimal values)
Book Value of Total Liabilities ($) = The sum of all current and longterm liabilities from the Balance Sheet.
(exclude commas or decimal values)
Sales ($) = Revenues from the Income Statement, including other income.
(exclude commas or decimal values)
Z:
Z1:
Z2:
The following table shows how these measures are used to calculate the three versions of the Z Score. The table is explained below.
Reasons for Multiple Versions
Two of the ratios shown in the figure have tended to limit the usefulness of the original Z Score measure. One of these ratios is X4, the Market Value of Equity divided by Total Liabilities. Obviously, if a firm is not publicly traded, its equity has no market value. So private firms can't use the Z Score. The other problem is X5, Assets Turnover. This ratio varies significantly by industry. Jewelry stores, for example, have a low asset turnover while grocery stores have a high turnover. But since the Z Score expects a value that is common to manufacturing, it could be biased in such a way that a healthy jewelry store looks sick and a sickly grocery store looks healthy.
To deal with these problems, Altman used his original data to calculate two modified versions of the Z Score, shown above. The Z Score is for public manufacturing companies; the Z1 Score is for private manufacturing companies; and the Z2 is for general use. Therefore, according to the table, if a company's Z2 score is greater than 2.60, it's currently safe from bankruptcy. If the score is less than 1.10, it's headed for bankruptcy. Otherwise, it's in a gray area.
How to Interpret the Z Score
The Z Score is not intended to predict when a firm will file a formal declaration of bankruptcy. It is instead a measure of how closely a firm resembles other firms that have filed for bankruptcy. It is a measure of corporate financial distress, a measure of economic bankruptcy.
How accurately does the Z Score measure economic bankruptcy? The original model has drawn several statistical objections over the years. The model uses unadjusted accounting data; it uses data from relatively small firms; and it uses data that today is nearly 60 years old.
And yet, despite these concerns, the original Z Score model is the bestknown and most widely used measure of its kind. This measure is far from perfect, but it's easy to calculate in Excel and many users continue to find it useful. At last count, for example, Google offered 308,000 links to the phrase, "Z Score".
The Z Score model is a tool that can complement your other analytical tools. Seldom, however, should you use any of the Z Score measures as your only means of analysis.