Page 115 - Auditinf Electronic System

Bankruptcy prediction:

Calculate total Z score and if:

• DISTRESS ZONE (Z < 1.81): If the Altman Z Score is less than 1.81, then
the firm is said to be in ‘Distress Zone’ means the financial position of the
company is in a distress and that the company if likely to head towards
insolvency in the next two years and files for a bankruptcy.

• GREY ZONE (1.81 < Z < 2.99): If the Altman Z Score is between 1.81 and
2.99, the firm is said to be in ‘Grey Zone’ which means it has a moderate
probability of bankruptcy in near future. It does not mean that firms lying in
this range have a weak financial stability but one needs to be cautious and be
diligent of the risks.

• SAFE ZONE (Z > 2.99): If the Altman Z Score is over 2.99, the firm is said
to be in the ‘Safe Zone’. Which means the company is has a strong financial
position and not headed towards bankruptcy in near future.

Second: Altman Z-model for Service companies
The Altman Z-score is a statistical model is a formula for determining whether

a company, is headed for bankruptcy. Based on formula takes into account
profitability, leverage, liquidity, solvency, and activity ratios.

Altman Z-Score = 6.56 x X1 + 3.26 X2 + 6.72 X3 + 1.05 X4

Where:
• X1 = working capital / total assets
• X2 = retained earnings / total assets
• X3 = earnings before interest and tax / total assets
• X4 = Book value of equity / total liabilities

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‫جميع الحقوق محفوظة ـ الإعتداء على حق المؤلف بالنسخ أو الطباعة يعرض فاعله للمسائلة القانونية‬