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ALTMAN, EDWARD Definition

ALTMAN, EDWARD developed the "ALTMAN Z-SCORE" by examining 85 manufacturing companies. Later, additional "Z-Scores" were developed for private manufacturing companies (Z-Score - Model A) and another for general/service firms (Z-Score - Model B). VentureLine selects the "Z-Score" appropriate for each firm based upon the questionnaire input from the listing company. A "Z-Score" is only as valid as the data from which it was derived i.e. if a company has altered or falsified their financial records/books, a "Z-Score" derived from those "cooked books" is of highly suspect value.

ORIGINAL Z-SCORE (For Public Manufacturer) If the Z-Score is 3.0 or above - banruptcy is not likely. If the Z-Score is 1.8 or less - bankruptcy is likely. A score between 1.8 and 3.0 is the gray area. Probabilities of bankruptcy within the above ranges are 95% for one year and 70% within two years. Obviously a higher Z-Score is desirable.

MODEL A Z-SCORE (For Private Manufacturer) Model A is appropriated for a private manufacturing firm. Model A should not be applied to other companies. A Z-Score of 2.90 or above indicates that bankruptcy in not likely, buyt a Z-Score of 1.23 or below is a strong indicator that bankruptcy is likely. Probabilities of bankruptcy within the above ranges are 95% for one year and 70% within two years. Obviously a higher Z-Score is desirable.

MODEL B Z-SCORE (For Private General Firm) Model B Z-Score is appropriate for a private general non-manufacturing firm. A Z-Score of 2.60 or above indicates that bankruptcy in not likely, buyt a Z-Score of 1.10 or below is a strong indicator that bankruptcy is likely. Probabilities of bankruptcy within the above ranges are 95% for one year and 70% within two years. A Z-Score between the two is the gray area. Obviously a higher Z-Score is desirable.

Learn new Accounting Terms

DEBT RATIO measures the percent of total funds provided by creditors. Debt includes both current liabilities and long-term debt. Creditors prefer low debt ratios because the lower the ratio, the greater the cushion against creditors losses in liquidation. Owners may seek high debt ratios, either to magnify earnings or because selling new stock would mean giving up control. Owners want control while "using someone elses money." Debt Ratio is best compared to industry data to determine if a company is possibly over or under leveraged. The right level of debt for a business depends on many factors. Some advantages of higher debt levels are:

• The deductibility of interest from business expenses can provide tax advantages.
• Returns on equity can be higher.
• Debt can provide a suitable source of capital to start or expand a business.

Some disadvantages can be:

• Sufficient cash flow is required to service a higher debt load.
• The need for this cash flow can place pressure on a business if income streams are erratic.
• Susceptibility to interest rate increases.
• Directing cash flow to service debt may starve expenditure in other areas such as development which can be detrimental to overall survival of the business.

 Formula: Total Liabilities / (Total Liabilities + Stockholders Equity)

COST CEILING, in project management, is the sum of the Project Cost Target plus the projects Contingencies cost allowances.

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