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Strategies & Market Trends
Bankruptcy Predictor Model

An SI Board Since March 1999

Posts	SubjectMarks	Bans
477	68	0

Emcee: Razorbak	Type: Unmoderated

Introduction Compact

Dear SI Members:

There is a specific mathematical model called the Altman Bankruptcy Predictor that is widely used in the turnaround industry to assess and predict a company's short-term survival prospects. The model is named after the renowned Edward I. Altman, Max L. Heine Professor of Finance at New York University's Stern School of Business, who published the initial research back in 1968.

stern.nyu.edu

Altman's Bankruptcy Predictor (or Z-score) is calculated as follows:

Z = (1.2*X1)+(1.4*X2)+(3.3*X3)+(0.6*X4)+(1.0*X5)

where:

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

According to one scholarly journal, Altman's Bankruptcy Predictor has proven consistently accurate over the period of time since its development. The original samples in Altman's research displayed accuracy of 95 percent based on data from approximately one year prior to failure. The accuracy dropped to 72 percent based on two-year data. Subsequent tests on firms that have gone bankrupt since 1968 have shown an accuracy level of 82 to 85 percent.

According to the same journal, Altman's model is also used for a number of different purposes throughout other industries besides the turnaround industry; i.e.:

a) Credit analysis for accept/reject decisions,

b) Investment analyses for money managers and investment bankers,

c) Auditors' analyses for going concern assessments,

d) Legal analysis for prudent man and failing company doctrine defenses, and

e) Merger target analyses both before and during reorganizations.

What Altman's formula doesn't tell you is what to do with the results. That you have to determine for yourself.

CAUTION!!! This analysis should only be used as an analytical tool. While it can greatly assist an investor or stakeholder in identifying weak companies for further investigation, it should not be used to the exclusion of other types of experienced and informed personal evaluation techniques. Also, please remember that, when using the Bankruptcy Predictor Model, the recent trend is the most important indicator of future success or failure. As you all know, companies' fortunes rarely turn on a dime.

Please let me know if you find Altman's model useful, and please feel free to post your own analyses using the formula.

All comments and analyses will be greatly appreciated. Thanks in advance.

Go to reply# or date (mm/dd/yy):

Reply	Message Preview	From	Recs	Posted
477	this strategy is much to volatile! please contact me to discuss about ways to ma	stefan meier	-	8/29/2005
476	I may actually have some of those final numbers figured wrong, since if a compan	who cares?	-	3/10/2003
475	Here's the companies that made both scans, from Oct and Now. First column is	who cares?	-	3/10/2003
474	Updated Altman Z Scores. 50mm market cap, 100k avg daily volume, z scores less t	who cares?	-	3/10/2003
473	I'm posting all I can find because we need to find one that is accurate. The	HighTech	-	2/20/2003
472	This one is good. You can select public or private as well as manufacturing and	HighTech	-	2/20/2003
471	Another Altman Z calculator. Try it out. insolvencyhelpline.co.uk	HighTech	-	2/20/2003
470	Here is a bankruptcy calculator for private firms not publicly held. jaxworks.c	HighTech	-	2/20/2003
469	A research paper of interest: sbaer.uca.edu	HighTech	-	2/20/2003
468	Here is an Altman-Z calculator. I have not tested it yet. Give it a try and see	HighTech	-	2/20/2003
467	Thx for the recent zscore groups. Can you rerun them in the near future? With	SlipperCat	-	1/3/2003
466	i guess they do! <:	Moez	-	12/4/2002
465	Interesting observation, HT. That was my intuition, but I couldn't confirm	Oblomov	-	12/4/2002
464	I find it interesting that in the last 6-8 weeks, despite the BP model producing	HighTech	-	12/2/2002
463	anyone here care to guess if UAL goes bankrupt? seems that the table-pounders on	Imran	-	12/2/2002
462	delete	DayTraderKidd	-	11/21/2002
461	Here is a link to the backtest backtest.org	HighTech	-	10/22/2002
460	These were the picks made last Friday. SHORT_ALTMAN_Z IMCL SEPR CVC A	HighTech	-	10/22/2002
459	yes, please post them. Thanks...	Oblomov	-	10/22/2002
458	You may already be aware of this or have discussed this here, but The Motley Foo	HighTech	-	10/22/2002
457	Sorry, don't use Multex, so no idea on doing the retained earnings on it.	who cares?	-	10/22/2002
456	has anyone built a Z screener on multex.com yet? i'm having trouble building	Imran	-	10/22/2002
455	and now the turds, the ones with zscore less than 1.8, market cap less than 50mm	who cares?	-	10/21/2002
454	Ok, this is all US stock on NYSE, AMEX and Nasdaq with market cap greater than 5	who cares?	-	10/21/2002
453	Crap, was going to get a big list of these on here alphabetical, so i could comp	who cares?	-	10/21/2002

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