Business Risk
Applicable Variables:
Industry/Sector, product innovation,
competition, business cycle,
consumer loyalty/branding,
environmental risks, and operational
efficiency.
An objective metric of business risk is the
Altman Z score contrived by professor Edward
Altman of NYU's Stern of Business in 1965.
The model proposes the following formula
as postulated within his book, Corporate Distress
and Bankruptcy.
Published in 1968 the Altman Z Score formula = (1.2 x A) + (1.4 x B) + (3.3 x C) + (0.6 x D) + (0.999 x E) where A is working capital / total assets, B is retained earnings / total assets, C is earnings before interest and task payment /total assets, D is the market capitalization/ total assets, and E is total sales/total assets. A Z-Score in excess of 2.99 implies it is unlikely to declare bankruptcy, a score between 1.23 and 2.99 denotes a sort of grey area status, while a score below this range indicates a distressed financial state, or sector deflation. The Altman Z-Score is not attributable to banks, insurance companies, private lenders, or any such financial institutions.
environmental risks, and operational
efficiency.
An objective metric of business risk is the
Altman Z score contrived by professor Edward
Altman of NYU's Stern of Business in 1965.
The model proposes the following formula
as postulated within his book, Corporate Distress
and Bankruptcy.
Published in 1968 the Altman Z Score formula = (1.2 x A) + (1.4 x B) + (3.3 x C) + (0.6 x D) + (0.999 x E) where A is working capital / total assets, B is retained earnings / total assets, C is earnings before interest and task payment /total assets, D is the market capitalization/ total assets, and E is total sales/total assets. A Z-Score in excess of 2.99 implies it is unlikely to declare bankruptcy, a score between 1.23 and 2.99 denotes a sort of grey area status, while a score below this range indicates a distressed financial state, or sector deflation. The Altman Z-Score is not attributable to banks, insurance companies, private lenders, or any such financial institutions.
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