Altman model

publication date 23.04.2012

Most entrepreneurs would wish to know whether their companies are financially sound or about to file for bankruptcy. The Altman model can give them a hint. 

 

The Altman model, based upon financial ratios, is designed to estimate the company´s future financial standing, namely delivering a timely prediction of a financial shortcoming or an eventual bankruptcy. The model was published in 1968 by Edward Altman, and became one of the fundamental models for the company´s financial analysis. 

The Altman model for corporations is defined as follows: 

 **Z = 1,2a + 1,4b + 3,3c + 0,6d + 1,0e**

 **a** = working capital / total assets               

 **b** = retained earnings / total assets; retained earnings =  after-tax earnings  -  dividends

 **c** = earnings before interest and taxes / total assets 

 **d** = market value of equity / book value of total liabilities

 **e** = sales / total sales  

Scoring for corporations: 

 **Z   >   2,99**              financially safe company

 **Z   =   1,81  -  2,99**   company with nondescript financial standing, grey zone

 **Z   <   1,81**              company in distress, heading for bankruptcy 

If you wish to know your company´s real financial condition, have us elaborate "Financial analysis here.":http://www.ownway.eu/offers/sound-company-financial-analysis/

 

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„Do not give credence to what they tell you without verification or without knowing it comes from a reliable information source.“ more >>

Jiří Střelec Jiří Střelec

It is all very easy to trust nice words of the others: how many skills they possess, how hard they will work, how they work overtime, etc. The reality, however, is anything but ideal. Company owners know their bit about it. Most likely to complain are managers and owners who do not check on new workers, who do not ask for references, do not call their last employer or carry out a spot check. Regardless of whether you are in production, construction, a sweetshop or a development department, it si always essential to verify information. It may not be outright fraud or a lie, very often it is just ignorance, different experience, etc. A timely checking will spare you a lot of time and money.

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