Altman's Bankruptcy Model

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Statistical Technique as a factor affecting the power of the predictive models Jeroen (2013) suggests that the statistical technique has an effect on the predictive power of the models. A study with one bankruptcy prediction model and multiple statistical techniques would allow to a more detailed analysis about the effects of these statistical techniques. Differences between the accuracy may imply that a specific bankruptcy prediction model is preferred in a specific economic period. According to M. Adnan Aziz and Humayon A. Dar, a doctoral researcher and a lecturer, many different models have been used to predict bankruptcy. These methods all have their particular strengths and weaknesses, and choosing between them for empirical application…show more content…
For which reason it is better for the company to regularly calculate for its Z-scores so as to make management aware of the potential risks the company would be facing, and therefore enable it to properly plan its next strategies. As observed in West Oyl Corporation, a company considered bankrupt as far back as 1993 and in 2005 is between bankrupt and safe, it is evident in the hasty management decision to acquire the capital-intensive machinery that techniques such as the Z-score model were not applied. The management failed to look at the company’s environment to predict future market demands and prepare for potential industry threats and opportunities. The only basis for the plant expansion was company profitability (Joy S. Rabo 2008). Multidimensional Analysis (MDA) is one of the most popular techniques used for analyzing insolvency (Perez 2006). The main advantage of the MDA approach to predict corporate failure is its ability to reduce a multidimensional problem to a single score with a high level of accuracy. However, MDA is subject to a number of restrictive assumptions. First, MDA requires the decision set which is used for distinguishing between failed and non-failed companies be linearly separable. Second, MDA does not allow a ratio’s signal to vacillate depending on its relationship with another ratio, or set of…show more content…
The results indicated that, if the Altman Z-Score is close to or below 3, it is wise to do some serious due diligence before considering investing. The Z-score results usually have the following "Zones" of interpretation: 1) Z-score above 2.99 - “Safe” Zones. The company is considered “Safe” based on the financial figures only. 2) 1.8 < Z < 2.99 - “Grey” Zones. There is a good chance of the company going bankrupt within the next 2 years of operations. 3) Z below 1.80 - “Distress” Zones. The score indicates a high probability of distress within this time period (Demer G. Paglomutan

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