Financial Forensic Tool for Investors: Altman Z Score Model

Dr. Vishal Rajendra Sandanshive

Learning Objective and Outcome

To study and identify the bankruptcy level by Altman Z-Score Model for investors

At the end of session – students will be able to analyze the financial position of a company by using Altman Z Score Model.

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Financial Forensics Tools for Investors

Altman Z-Score

James Montier C-Score

Beneish M-Score

Piotraski F-Score

Financial Forensics is a field that combines investigation skills with financial auditing skills to identify criminal or irregular or illegal activity coming from within or outside of an organization.

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Altman Z-Score was developed from the original Z-Score

Predicting the chances of a company becoming bankrupt

Accuracy Level is 80 % to 90 %

A prediction of bankruptcy 2 years before it happened had an accuracy of 72%

Altman Z-Score Model

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Key Financial Ratios

Market Value of Equity / Total Liabilities

Retained Earnings / Total Assets

Sales / Total Assets

Earning Before Interest and Tax / Total Assets

Working Capital / Total Assets

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Altman Z-Score Model – For Manufacturing Company

Distress Zone

Grey Zone

Safe Zone

0

1.8

3.0

4.0

Altman Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

Where:

A = Working Capital / Total Assets

B = Retained Earnings / Total Assets

C = Earnings before interest and tax / Total Assets

D = Market value of equity / Total Liabilities

E = Sales / Total Assets

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Case 1: Lanco Infratech Ltd.

Listed as fastest growing company in the world and became the largest private power provider in India

Declining stage – Starting defaulting in arrears of interest and principal payments

Filled for the legal bankruptcy

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Case 2: Alok Industries

Mumbai based textile manufacturing company had an IPO with of 4.5 cr. in 1993

As per Altman Z-Score model company was in Grey Zone

Distress Zone

2018

Bankrupt

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Calculations of Altman Z-Score Model for �Bankrupt Companies in the past

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