x1 = net working capital / total capital (assets)

x2 = retained earnings / total capital

x3 = earnings before interest and taxes / total capital

x4 = market value of equity (market price of shares) / debt capital

x5 = turnover (sales) / total capital

WHAT IS IT?

Altman's analysis is one of the very effective financial analyses, which, based on six selected indicators, allows defining with a certain probability the state and direction of an organization and thus can predict its future. More here

CALCULATION:

EXAMPLE:

The company's total assets are valued at $3,500,000, while their working capital is $4,200,000. Their liabilities amount to $5,000,000, while retained earnings are $800,000. Earnings before interest and taxes reached $6,500,000. Total sales are $8,300,000, while the market value of equity is $7,000,000.

** Z = (1.2 x A) + (1.4 x B) + (3.3 x C) + (0.6 x D) + (0.999 x E)**

(1.2 x (4,200,000 / 3,500,000)) + (1.4 x (800,000 / 3,500,000)) + (3.3 x (6,500,000 / 3,500,000)) + (0.6 x (7,000,000 / 5,000,000)) + (0.999 x (8,300,000 / 3,500,000))

= (1.2 x 1.2) + (1.4 x 0.229) + (3.3 x 1.857) + (0.6 x 1.4) + (0.999 x 2.371)

Altman Z-Score = **11.097 - safe zone.**

YOU MIGHT BE INTERESTED IN:

COMMENTS: