Consider an Australian company for which we know the following (all amounts in AUD):
working capital is 170'000;
total assets are 670'000;
earnings before interest and taxes are 60'000;
sales are 1'300'000;
the market value of equity is 380'000;
total liabilities are 240'000;
retained earnings are 300'000.
What is the Z-score
Z-score is 4.12
It is important to note that a Z-score of 4.12 is very high and would indicate very low bankruptcy risk for the company. It is possible that this high Z-score is due to the company having a strong financial position with high levels of working capital and retained earnings relative to its total assets and liabilities. However, it is also possible that there may be other factors impacting the calculation of the Z-score, such as the specific industry or market conditions that the company operates in.
The Z-score is a measure of a company's financial health and the probability of it going bankrupt. It was developed by Edward Altman in the 1960s and is calculated based on several financial ratios.
To calculate the Z-score, you need to calculate five financial ratios and assign weights to them. The formula for the Z-score is:
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 Taxes / Total Assets
D = Market Value of Equity / Total Liabilities
E = Sales / Total Assets
Let's calculate each ratio and then plug them into the formula to calculate the Z-score.
A = Working Capital / Total Assets = 170,000 / 670,000 = 0.2537
B = Retained Earnings / Total Assets = 300,000 / 670,000 = 0.4478
C = Earnings Before Interest and Taxes / Total Assets = 60,000 / 670,000 = 0.0896
D = Market Value of Equity / Total Liabilities = 380,000 / 240,000 = 1.5833
E = Sales / Total Assets = 1,300,000 / 670,000 = 1.9403
Now, plug these values into the formula:
Z-score = 1.2(0.2537) + 1.4(0.4478) + 3.3(0.0896) + 0.6(1.5833) + 1.0(1.9403)
= 0.3044 + 0.6273 + 0.2957 + 0.94998 + 1.9403
= 4.11768
So, the Z-score for the Australian company is approximately 4.11768. This indicates a relatively healthy financial position and a low probability of bankruptcy. However, it's essential to note that the interpretation of the Z-score can vary depending on the industry and other contextual factors.
The Z-score is calculated as follows:
Z-score = (Working Capital + Retained Earnings) / (Total Assets - Total Liabilities)
Z-score = (170'000 + 300'000) / (670'000 - 240'000)
Z-score = 470'000 / 430'000
Z-score = 1.09