Which among the following is a numerical measurement that is used to predict the chances of a business going bankrupt in the next two years.

Solution

The Altman Z Score is used to predict the likelihood that a business will go bankrupt within the next two years. The formula is based on information found in the income statement and balance sheet of an organization. The Z score is based on the liquidity, profitability, solvency, sales activity, and leverage of the targeted business. Z Score is a useful metric for an outsider who has access to a company's financial statements. In its original form, the Z score formula is as follows:   Z = 1.2A x 1.4B x 3.3C x 0.6D x 0.99E   The letters in the formula designate the following measures:   A = Working capital / Total assets [ Measures the relative amount of liquid assets]   B = Retained earnings / Total assets [Determines cumulative profitability]   C = Earnings before interest and taxes / Total assets [measures earnings away from the effects of taxes and leverage]   D = Market value of equity / Book value of total liabilities [incorporates the effects of a decline in market value of a company's shares]   E = Sales / Total assets [measures asset turnover]