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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: TimbaBear who wrote (15337)	8/27/2002 2:14:51 PM
From: Bob Rudd	Read Replies (1) \| Respond to of 78702

Timba: <<what is a sure-fire bankruptcy score, according to each formula?>>There is no sure-fire method of predicting bankruptcy...although some of the models tested over 80% accuracy, I suspect that's an exaggeration. Here are scores: Altman's Bankruptcy Predictor (or Z-score) calculation. Z = (1.2X1)+(1.4X2)+(3.3X3)+(0.6X4)+(1.0*X5) X1= Working capital/ Total Assets = WC/TA X2= Retained Earnings/ Total Assets = RE/TA X3= EBIT/ Total Assets = EBIT/TA X4= Market Value of Equity/ Book Value of Liabilities = MVE/ BVTL X5= Total Sales/ Total Assets = TS/TA The Altman Z-score is used to determine a company's short-term outlook or future viability, where, >3.0 ... Strong; 1.8-3.0 ..... In Danger & <1.8 ..... Near death Notes: USE ANNUALIZED FIGURES for EBIT and Total Sales when using data from a quarterly report. Market Value of Equity is the combined market value (market price X shares outstanding) of all shares of stock, including common and preferred ALTMAN modified for Non-Manufacturing & Service Firms The X.sub.5 (Sales/Total Assets) ratio is believed to vary significantly by industry. It is likely to be higher for merchandising and service firms than for manufacturers, since the former are typically less capital intensive. Consequently, non manufacturers would have significantly higher asset turnover and Z scores. The model is thus likely to underpredict certain sorts of bankruptcy. To correct for this potential defect, Altman recommends the following correction that eliminates the X.sub.5 ratio: Z.sub.11 = 6.56 X.sub.1 + 3.26 X.sub.2 + 6.72 X.sub.3 + 1.05 X.sub.4 The predetermined cutoffs for the Z score are as follows: Bankrupt BK? less than 1.1 Weak 1.1-2.6 Strong greater than 2.6 The Zmijewski model is a weighted probit bankruptcy prediction model. The X statistic is purportedly a surrogate for the probability of bankruptcy. X = - 4.3 - 4.5 X1 + 5.7 X2 - .004 X3 (1) X1 = net income/total assets; X2 = total debt/total assets; X3 = current assets/current liabilities; X = overall index est of probability of bankruptcy <<I don't have Altman's book (although it is now on my list)>>I asked Prof. Altman which of his books he'd recommend for distressed investing...his response was to recommend 'Bankruptcy Investing' by Branch and Ray [I found it on EBAY for ~5, but that was luck - it's out of print] My favorite on the topic, though, is Principles of Corporate Renewal by Platt, which is considered the 'textbook' of the turnaround industry. <<don't have access to the other Journal articles>>Here's some stuff on the subject that's just a click away. www-personal.umich.edu spectrum.troyst.edu bbk.ac.uk Hope this helps, Bob