Altman Z-Score Calculation Example

Suppose a public manufacturing company is at risk of insolvency following

several periods of underperformance, particularly in terms of profitability.

Using the original z-score model, estimate the chance of bankruptcy of the public
manufacturing company.

The following assumptions will be used for our modeling exercise.

Current Assets = $60 million

Current Liabilities = $40 million

Fixed Assets = $100 million

Net Income = $10 million
Dividends = $2 million

Sales = $60 million

COGS and SG&A = $40 million (“Cost of Goods Sold = COGS” & “Selling,
General, and Administrative expenses =SG&A”)

P/E Multiple = 8.0x

Total Liabilities = $120 million

Solution
Given those initial assumptions, our next step is calculating the remaining inputs.

Working Capital = $60 million – $40 million = $20 million

Total Assets = $60 million + $100 million = $160 million
Retained Earnings = $10 million – $2 million = $8 million
Operating Income (EBIT) = $60 million – $40 million = $20 million
Market Capitalization = 8.0x × 10 million = $80 million

The inputs for our z-score calculation are the following:

X1/A/T1 = Working Capital ÷ Total Asset = 0.13 ( 20 Million/160 Million)

X2/B/T2 = Retained Earnings ÷ Total Assets = 0.05 ( 8 Million /160 Million)

X3/C/T3 = EBIT ÷ Total Assets = 0.13 (20 Million/ 160 Million)

X4/D/T4 = Market Capitalization ÷ Total Liabilities = 0.67 (80 Million/120

Million)

X5/E/T5 = Sales ÷ Total Assets = 0.38 (60 Million/ 160 Million)

We then plug the inputs into our z-score formula:

Z-Score = (1.20 × 0.13) + (1.40 × 0.05) + (3.30 × 0.13) + (0.60 × 0.67) + (0.99 ×
0.38) Z-Score = 1.40

Since the z-score of 1.40 is below 1.81, our company is in the “Distress Zone,”
where the risk of near-term insolvency is high.
In Financial Modelling