In this example, we will perform an analysis similar to Altman's Z-score. In his paper, Altman looked at a company's likelihood of defaulting within two years based on several financial metrics. The following is taken from the Wikipedia page of Altman's Z-score:
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Z-score formula |
Description |
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T1 = Working capital / Total assets |
This measures liquid assets in relation to the size of the company. |
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T2 = Retained earnings / Total assets |
This measures profitability that reflects the company's age and earning power. |
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T3 = Earnings before interest and taxes / Total assets |
This measures operating efficiency apart from tax and leveraging factors. It recognizes operating earnings as being important to long-term viability. ... |
