Question

Attached below is the data for Twilight Company:

Items Total Asset Working Capital Operating Income (EBIT) Total Debts Retained Earning Sales Market Value of Shares Capital (in million rupiah) Amount 100.000 11.000 15.000 190.000 50.000 140.000 60.000 Calculate the Altman Z-Score in predicting the potential bankruptcy of that firm. And give the explanation for calculation result.

Answer 1

We will use the formula

Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E to calculate the value

where,

A = working capital / total assets = 11/100 =0.11

B = retained earnings / total assets = 50/100 =0.5

C = earnings before interest and tax / total assets = 15/100 =0.15

D = market value of equity / total liabilities = 60/190 =0.32

E = sales / total assets = 140/100 = 1.4

Based on the above values,

Z-Score = (1.2*0.11) + (1.4*0.5) + (3.3*0.15) + (0.6*0.32) + (1.0*1.4)

Z-Score = 2.92

A Z-Score of less than 1.8 means the company is headed for bankruptcy. A score greater than 3 means the company is not likely to go for bankruptcy.

This company has a z-score of 2.92, which means there is no immediate danger of bankruptcy. However, the company must strive to keep the score above 3 at all times.