Post by nShrestha on Dec 24, 2013 13:08:19 GMT 5.75
Bankruptcy test is developed by Edward I. Altman in 1968 which used to predict the probability that a firm will go into bankruptcy within two years.
Formula;
Z= 1.2 X1+1.4 X2+3.3 X3+0.6 X4+0.999 X5
Where,
X1 = Working Capital/ Total Assets
X2 = Unappropriated Retained Earnings/ Total Assets
X3 = EBIT/Total Assets
X4 = Total Shareholders Equity/ Total Liabilities
X5 = Total Revenues/Total Assets
Interpretation of Z Value
Formula;
Z= 1.2 X1+1.4 X2+3.3 X3+0.6 X4+0.999 X5
Where,
X1 = Working Capital/ Total Assets
X2 = Unappropriated Retained Earnings/ Total Assets
X3 = EBIT/Total Assets
X4 = Total Shareholders Equity/ Total Liabilities
X5 = Total Revenues/Total Assets
Interpretation of Z Value
| Z Value | Interpretation |
| Z > 2.99 | “Safe” Zones - Organizational will not bankrupt |
| 1.81 < Z < 2.99 | “Grey” Zones |
| Z < 1.81 | “Distress” Zones - Organization will go into Bankruptcy within two year |