One of the tools used by financial analysts to assess the viability of a business is Altman’s Z-score. Corporate failure is linked to a series of actions which are related to a company’s fundamentals which long-term reflect the likelihood of a business going bankrupt. According to this statement, Prof.E.I.Altman developed in 1968 a multivariate statistical model considering a linear combination of several financial ratios that allow to differentiate between failing companies a non-failing ones.
The result obtained from the model gives what is known as the Z-score. Low values indicate the company has a high probability of failing while high values predict the company is less likely to fail. In fact, Altman’s seminal work predicted correctly 72% of the bankrupted companies two years prior to the event.
However, the Z-score is an explanatory tool rather than an instrument to forecast business viability, and this tool should only be used as a baseline or a first approach to viability assessment. For instance, it is suggested to analyse thoroughly those companies with lower Z-index values while resources and time can be saved with those obtaining higher values.
This app includes the model that R.Taffler calculated for UK companies. Likewise, it can be established that Taffler's z-scores with negative values lead to companies with high probability of default while those with positive values can be considered as in better financial stance.
An estimate of the probability of default is calculated by using a logistic cumulative function.
