Altman’s Z-Score Model
by theorangedog on Feb.06, 2008, under Skills
Using multiple discriminate analysis, Edward Altman created a model that provides guidance regarding a company’s credit health. The model is named The Z-Score Model. Upon providing measures from a company’s financial statements, the model would yield a single variable that is designed to be compared to a pre-specified scale. The placement of the Z-score on the scale would indicate whether a company was likely to head toward bankruptcy.
I implemented the model in Excel, and it can now be accessed through the Models page of the foquant.com website.
This model was also covered in the Fixed Income curriculum for the CFA Level 2 exam.
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Welcome to theorangedog.net.
This site is my dashboard for links and information on topics related to Skills (Finance), Spirits (Whisky & Beer), and Speed (Races & Training).
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February 6th, 2008 on 7:24 pm
I found your site on google blog search and read a few of your other posts. Keep up the good work. Just added your RSS feed to my feed reader. Look forward to reading more from you.
- Jason.
February 7th, 2008 on 7:53 pm
You might be interested in this, if you liked the Z-Score.
Fundamental Analysis for Solvency and Earnings Quality
February 7th, 2008 on 8:12 pm
Your EQ metrics are nice in that they focus on operating cash flow. So often, including during my time in business school but especially in the M&A space, I’ve seen people trying to focus on cash flow measures based on EBIT and EBITDA. While they are conversationally convenient and regularly used, OCF really is the key. Great blog post (and I cleaned up the link in your comment here simply for clarity).
February 8th, 2008 on 5:26 am
Thnx. I was hesitant to type the php to have a clean link because I don’t know how itchy the trigger finger is on your spam block!
You could probably put together an alternative to Z-Score with some EQ metrics, combined with some debt payment metrics like effective interest rate paid, debt/cash flow, interest coverage based on cash flow, etc. I think anyone interested in being a financial analyst - as opposed to just a trader - might want to look into that.
For trading, just knowing the relevant anomalies and considering adding them to the choice metrics is probably as far as one needs to go.