What’s the likelihood of the company going bankrupt?

What are advance singnals corporate solvency (possibility to bankruptcy)
What are advance singnals corporate solvency (possibility to bankruptcy)
Statistical check Of Corporate Solvency (Altman Z-score)

After suffering the heavy losses in few of my earlier stocks in Chinese companies, I was away from the stock market. Few weeks were very painful to  overcome the fear of investment. Though, the reason of the stocks got bankrupt, were simple. Both the companies – China Agritech (CAGC) & Wonder Auto (WATG) was a fraud and de-listed from the New York Stock Exchange (NYSE).

So, What’s the Likelihood of company going bankrupt?

Here comes the Altman Z-score to gauge the possibility of solvency a corporate (credit-strength test) for publicly traded manufacturing company.

What is the ‘Altman Z-Score’?

Altman Z-score is based on 5 financial ratios that are calculated from the company balance sheet found in quarterly statements.


Risk of Bankruptcy Altman Z-Score
Risk Of Solvency

For manufacturing sector z-score= 1.2A + 1.4B + 3.3C + 0.6D + 1E

For non-manufacturing sector z-score= 6.56A + 3.26B + 6.72C + 1.05D

Where A, B, C, D and E are following parameters:


A= Working Capital / Total Assets [Liquid assets measurement]

 

B = Retained Earnings / Total Assets [Profitability Measurement]

 

C = Earnings Before Interest and Taxes / Total Assets [Operating efficiency Measurement]

 

D = Market Value of Equity / Book Value of Total Liabilities [Valuation measurement]

 

E= Sales/ Total Assets. [Asset turnover measurement]


 

My Notes on Altman Z-Score check

  • Altman z-score is a likelihood and not a prediction. The score measures the probability of default due to the financial distress based on the current financial statistics of the company.
  • I invest strategically for the long-term. Though, I have many example where this proved incorrect. So, I consider this an important information.
  • This is not full-proof test. It’s rather for statistical satisfaction. I do due diligence on 7-checks of highly effective investors. Stay tuned for next posts.

 

At what frequency need to calculate Altman Z-Score?

Since the price of the stock changes in market, I calculate it before buying. (actually, on many website, it is readily available). I check sites like morningstar, marketwatch, or simply Google. Easy isn’t it?

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