Bankruptcy Model

Professor Altman has developed a model using financial statement ratios and multiple discriminant analysis to predict bankruptcy for publicly traded companies. The model is as follows:

Z =  3.3 (EBIT / Total Assets) + 1.2 (Net Working Capital / Total Assets) + 1.0 ( Sales / Total Assets) + 0.6 ( Market Value of the Equity / Total Liabilities) + 1.4 ( Retained Earnings / Total Assets)

Altman Z-Score
Bankruptcy Predictor

Ratio Formula Weight Weighted
Factor Factor
Return on Total Assets EBIT $600 3.3 1.1000
Total Assets $1,800
Sales to Total Assets Net Sales / $3,000 1.0 1.6667
Total Assets $1,800
Equity to debt Market Value of Equity/ $800 0.6 0.8000
Total Liabilities $600
Working Capital to Total Assets Net Working Capital/ $300 1.2 0.2000
Total Assets $1,800
Retained Earnings to Total Assets Retained Earnings/ $400 1.4 0.3111
Total Assets $1,800

Z Score  =                                                             4.0778

Z-Score above 2.99 –     “Indicates no bankruptcy”
Z-Score between 1.81 & 2.99 –    “Warning Signs”
Z-Score below 1.81 –    “Indicates a bankruptcy prediction”

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