Articles on Bankruptcy & Insolvency Issues

THE ALTMAN Z'-SCORE FOR PRIVATE FIRMS

The Revised Model (A Variation Adapted for Private Firms)
(This Model of Z'-Score is for Private Firms. To learn about the Z-Score Model for Publicly Traded Firms Click Here)

The original Altman Z-Score model applies to publicly traded companies since it requires stock price value i.e. it employs 'market value' of equity. Random adjustment of 'book value of equity' of a private firm and substituting it as 'maket value of equity' in the original Altman Z-Score formula is neither scientific nor valid. This was a common dilemma faced by financial analysts when analyzing private companies using the original z-score model.

In order to give the credit analyst an insolvency valuation model for private firms, the score had to be revised and adapted. The revisited Altman Z'-Score is now recalibrated for privately held companies which takes into account the 'book value' of equity and not the unapplicable 'market value of equity' used in the original expression.

Altman's methodology for calculating Z'-Score for private firms still subscribes to statistical methods and multiple discriminant analysis. These multiple variables are taken from the private firm's financial statement and plugged into linear combination of five financial ratios with weighted coefficients which are altered from the original z-score as follows:

This score uses statistical techniques to predict a company's probability of failure using the following 8 variables from a company's financial statements:

{For Z' Score the following 8 inputs are essential: {Current Assets; Current Liabilities; Total Liabilities; EBIT; Total Assets; Net Sales; Retained Earnings; Book Value of Equity}

The 5 financial ratios in the Altman Z'-Score for Private Firms and their respective weight factor is as follows:

 
RATIO
WEIGHTAGE
 
A
EBIT/Total Assets
x. 3.107
-4 to +8.0
B
Net Sales /Total Assets
x 0.998
-4 to +8.0
C
Book Value of Equity / Total Liabilities
x 0.420
-4 to +8.0
D
Working Capital/Total Assets
x 0.717
-4 to +8.0
E
Retained Earnings /Total Assets
x0.847
-4 to +8.0


These ratios are multiplied by the weightage as above, and the results are added together. 

 Altman Z'-Score (Private Firms) = (A x 3.107) + (B x 0.998) + (C x 0.420) + (D x 0.717) + (E x 0.847)

The Interpretation of Z' Score:

Z'-SCORE ABOVE 2.9 -  The company is deemed Safe based on the given financial figures only. 
Z'-SCORE BETWEEN 1.23 and 2.9 - On Alert. This is the grey zone and one should exercise Caution.
Z'-SCORE BELOW 1.23 - Probability of Financial Embarassment is very High.

Use the following Z'-Score Insolvency Prediction Online Calculator for Private Firms to assess the financial stress of a privately held company.

Note: To calculate the Z'-Score for a publicly traded firm (click here)

Calculator - Altman Z' Score (for Private Firms)

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