Altman Z Score | Formula | How to Calculate? - YouTube

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clicking the bell ican welcome back we have topic today for the day is Altman

z-score I mean this name itself is gonna sound to you as if like it's something

really complicated don't worry we make simple things they make complicated

things more simple well you have a formula here 1.2 x working capital divided

by total assets 1.4 divided by some of the formula and it's been put up till

the end we have done enough for deatails no issues we'll try and understand this

see the Altman's Z score let's call it is a type of sets which was published by Sir

Edward Altman in 1968 as z-score formula which was used to predict the chances of

the bankruptcy so this methodology can be used to predict the chances of the

business organization to move into bankruptcy ok so this is the reason

within a given time and which is mostly about loosely 2 years of time span so

this method is successful in predicting the status of the financial distress

whatever financial distress is there you know it can be predicted in any firm in

Altman's it's called no it can help in measuring the also the financial health

of a business organization by the use of the multiple balance sheet values and

and corporate incomes so what this formula is all about okay the formula of

all Altman Z Score it is basically designed for public publicity no

publicly held manufacturing firms with a value more than $1,000,000 of 1 million

in terms of the network so the 5 financial ratios that is used in

calculation of the Altman's Z core formula are A the working capital divided by the

total assets

then we have be in here lined up as retained earnings divided by the total

assets we have earning before interest tax interest in the tax payment divided

by the total assets B we have the equity market value divided by the total assets

so retain earning total assets everything is compared to total asset

working capital retained earning EBIT and equity market value and E that the

final thing that's the total sales divided by the total assets that will be

divided so the Altman z-score formula for the model for determining the

probability that a firm to close the bankruptcy her 1.2 X A that was the

working capital into B X C X D and E okay

so in this model if the Z value is greater than 2.99 the Z value over here

if it is greater than 2.99 then the firm is said to be in the safe zone it is

considered in the safe zone and it has a negligible probability of filing

bankruptcy I have the Z value is between let's say 2.99 and

1.81 then the firm is say to be in the what we call as the grey zone

okay and has a moderate probability for bankruptcy and finally the Z value below

that is less than 1.81 then it is said to be in the distress

zone and has a very high probability of reaching this stage of what we call as

bankruptcy now let's do the application part of altman z-score in predicting the

bankruptcy the value of the altman z-score is generally found around minus

2.5 or sorry 0.25 for the firms that have been the highest probability of

going bankrupt and on the other hand for the firm that is least probability of

facing the bankruptcy the value of the Altman's Z core is as high as

4.4 second you know the Altman's Z Score formula is helpful for

investors to determine if they should consider buying a stock or sell some of

the stocks then they have then generally the altman Z Score below 1.8 the notes

that the firm is under the chance of getting into bankruptcy on the other

hand the form with the Altman's at score greater than

assume to be less likely to go bankrupt so an investor can decide to buy a stock

of the Altman's that score is closer to 3 over greater than 3 and similarly

they can decide to sell a stock if the value is closer to 1.8 or less than 1.8

now if you see in 2007 the specific asset securities had been given higher

credit rating than they must have been so however the companies were correctly

predicted to be increased in their financial risk and should have been

heading on towards the bankruptcy lineup ever see the Altman and calculated that

the median ultimate score but the firms in 2007 was

1.81 so this company's credit ratings were

the same as that of the financial ratio of B which is used for the formula in

Z so this indicates that this was this

indicated that in the almost half of the companies are being rated lower and they

were extremely distressed and they had a high level of likely of reaching the

stage of bankruptcy therefore the Altman Z Score calculation

led him to believe that you know the crisis would occur and there would be a

meltdown what we call as you know credit market so ultimate believe that the

crisis would steam from the company's defaults no however the meltdown began

from the markets back down security is the a that's MBS and still the form

was shortly defaulted in 2009 second higher rate in the history as

predicted by the Altman Z Score said score altman's it's goes for private

firms if you see for the private firms the origin of the altman Z Score let's go

formula is modified to fit in the case of the private forms in the business

ratio in the case are you know a that is the current assets less the current

liability divided by TA total assets in case of B here we know Retained and earnings

divided by TA total assets in case of C we had EBIT/TA by the t

a total assets then D we have the book value BV of equity divided by the total

liability and each finally that is the sales/ TA right so the

actual Altman z-score formula for this model for determining the probability

for a firm to close bankruptcy is over here you'll multiply this

0.717 over here 0.847 we hear 3.107

0.420 and 0.998 for the private firms

and in this model if the Z value over here if it is greater than or

2.99 and 1.23 then in that scenario the firm is said to be

the what we discussed as the gray zone and has a moderate chance of the

bankruptcy and de finally if the Z value is

No if it is less than 1.23 and it is said to be in the

distress and has a very high level of probability of reaching the stage of the

bankruptcy now how about we see the Altman's Z Score for the non

manufacturing firm developed in the emerging market so the original Z or

ultimate let's go formula is slightly modified to be used in case of the forms

that are non manufacturing and operating in the emerging markets so we use only

the four financial ratios in this model the full financial ratios are a current

assets minus current liabilities year by total assets we have retained earnings

nearby total assets EBIT it finally the book value will deduct the sales part

the actual Altman z-score over here is going to be for non manufacturing firm

6.56 and 3.26 ,6.72 and 1.05

the actual formula Altman Z Score formula for this model for determining

probability for a non manufacturing firms you know operating in the emerging

markets to file a bankruptcy in this particular format you multiply this with

A and B so in this model the Z value is greater than if it is greater than

2.6 then in that particular scenario the firm is say to be in the safe

zone and the negligible probability of filing a bankruptcy now if the z score

is between 2.6 to 1.1 then the form is said to be indeed

what we call as the gray zone and as a mortared chance of bankruptcy and if the

Z value is let's say below 1.1

then it is said to be the destroyed zone

and has a very high probability of reaching the stage of bankruptcy so

after discussing all of this let me give you my final conclusion of this the

Altman Z score is widely used metric with the wide application and it is one

of these several credit marking models already in use that combines the

quantifiable of the financial indicate with a small range of variables which

will help us to predict whether or not the formal will financially fail or go

into bankruptcy system know however over the years since it is the introduction

of the set score has been improved to become one among the reliable predictor

for the bankruptcy and many analysis nowadays uses method above any other

because of its wide application in fact once Altman re-evaluated the strategies

you know by examining the 86 distress firms in 1969 to

1975 and then 210 our bankrupt firms that was between 1976 to 1955 and letter

closely to 120 firms from 1996 to 1999 so the z-score has been accurately

leveled between 82% to 94 percent which was more than that achieved by any other

methodologies that existed however the garbage in garbage out moto applies here

as well because therefore you know if your firms financial or the input data

are misleading or incorrect then the Z Score will go wrong and will not be

helpful at all our analysis and the prediction is in the prediction for the

bank so that's it for this particular topic if you have learned and enjoyed

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