Altman Z Score Model
The analytical study of Altman Z score on nifty 50 companies
SANESH.C
Assistant Professor
Sri Vyasa Nss College
Wadakkanchery ,Thrissur
Abstract
Stock market investments are subject to market risks and there is a possibility for loosing of all the money invested. Investment decisions are so crucial for a successful investor. Investors are using different techniques for stock selection and for investment. The Altman Z-score is a widely used measure that applies an algorithm that has been found to have useful predictive value on the likelihood of a business going bankrupt. In this paper trying to assess the Altman Z-score of nifty 50 companies excluding banks and financial companies. The score tries to predict probability of default by the companies
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A stock price that changes quickly and by a lot is more "volatile”. This makes a stock riskier – you could lose a lot if you had to get your money out on short notice.One important tool that predicts the volatility and has gained popularity since 1985 is Edward Altman’s Z – Score Model (Altman, 1968). It is a multivariate formula used for the measurement of the financial health. It has gained wide acceptance with a variety of stake holders like investors, financial analysts, consultants, bankers, auditors, management accountants, courts, and database systems. Further it is also used for evaluation of loans (Eidleman, 2003), as it offers an excellent measure for evaluating the financial health of a subject business. It explicitly measure(s) a firm’s relative liquidity, longevity, operating profitability, leverage, solvency, and productivity—virtually all aspects of corporate performance, lead to clearer conclusions, avoid judgment bias, reliability. The Altman Z-score is a widely used measure that applies an algorithm that has been found to have useful predictive value on the likelihood of a business going …show more content…
A study conducted by Price water Coopers(2002) on 1,200 publicly owned manufacturing companies (data from 1998 to 2001) concluded that the Z-score remains a viable measure of financial distress. It has been used to predict viability in a number of sectors like telecommunications (Permatasari, 2006), wood industry (Muhammad, 2008), pharmaceuticals (Ambarsari, (2009), etc. In all these situations, it was found that the respective industries were in distress financial situation, which was later proved correct. The studies thus proved that Altman model of Z-score would provide accurate prediction of financial distress.
Working Methodology
Z- score formula was developed by Edward Altman, Assistant Professor of Finance at New York University. The score predicts the bankruptcy or the likelihood of financial distress within two years of the company and was first published in the 1968. The score tries to predict probability of default by the companies due to the financial distress based on the current financial statistics of the company.
The Z-score formula for the manufacturing companies is:
Z = 1.2T1 + 1.4T2 + 3.3T3 + 0.6T4 + 1T5
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