This article will discuss the Altman model and its application to predict possible bankruptcy.

The model is a function of economic indicators that characterize the activities of the enterprise and can demonstrate the degree of risk of bankruptcy of the company.

To create a model, Edward Altman studied the financial situation in 66 companies, some of which continued to work successfully, and some went bankrupt. The model shows the likelihood of future bankruptcy, and the indicators that are involved in the model characterize the company's potential and performance for the reporting period.

We will look at three Altman models that allow you to conduct.

1. 1. Altman's two-factor model. The fewer factors, the easier the calculation. This model is simple and clear. For the calculation, two indicators are taken: the current liquidity ratio and the share of borrowed funds in liabilities.

Z = -0.3877 * KTL + 0.579 * ZK / P

Where KTL is the current liquidity ratio, ZK is the share of borrowed capital, P is the sum of liabilities

If the coefficient is higher than 0, then the probability of bankruptcy is very high.

How accurate is this forecast? This question was asked by the doctor of economic sciences Fedotova M.A. In her opinion, the forecast can be made more accurate with the help of an additional, third indicator - the return on assets. But, it was not possible to bring this corrected model to the form demanded in practice. This requires sufficient statistics on bankrupt enterprises, but in Russia there is no such statistics and, therefore, it is not possible to determine the adjustment coefficient for the indicator.

1. 2. Altman's five-factor model is the most popular. It was her that Altman published in 1968. The model, which is calculated according to formula 1, is designed to determine the probability of bankruptcy joint stock companies issuing shares for free circulation on the market.

Z= 1.2 * X1 + 1.4 * X2 + 3.3 *X3 + 0,6* X4 + X5 (formula 1)

The formula 1 calculation applies only to large companies whose shares are traded on the stock market.For companies whose shares are not traded on the stock market, a new, improved formula was developed in 1983. It looks like:

Z = 0.717 * X1 + 0.847 * X2 + 3.107 * X3 + 0.42 * X4 + 0.995 * X5

Where X 1 is the ratio of the working capital and assets of the enterprise. The ratio reflects the share of the company's net and liquid assets in the total assets.

X2 - the ratio of retained earnings and assets of the company (financial leverage).

X 3 - this indicator characterizes the amount of profit before tax in relation to the value of assets.

X 4 - for formula 1, this is the cost of the company's equity in market valuation in relation to the carrying amount of the entire amount of the liability; for formula 2 it is X4 - book value of equity in relation to borrowed capital.

X 5 - coefficient characterizing the return on assets. Calculated as the ratio of sales to the total assets.

The five-factor model allows financial analysis of bankruptcy with a more accurate forecast. The table below shows the values Z and the values ​​of the probability of the onset of a critical situation at the enterprise. For companies whose shares are not listed on the stock exchange, the values ​​of the coefficient showing the likelihood of bankruptcy are slightly lower.

The value of the calculated indicator Z for companies whose shares are quoted on the stock exchange	The value of the calculated indicator Z for companies whose shares are not listed on the stock exchange	Bankruptcy probability	A comment
m less than 1.8	less than 1.23	from 80 to 100%	The company is insolvent
1.81 to 2.77	1.23 to 2.90	35 to 50%	Uncertain situation
2.77 to 2.99		15 to 20%	Uncertain situation
over 2.99	over 2.90	The risk that the company will not be able to pay off its debts is negligible	The company is financially stable

This model allows predicting a possible bankruptcy in a year with an accuracy of 95%, in two years - with an accuracy of 83%, which indicates the reliability of such a forecast.

1. 3. Seven-factor model in practice it is rarely used, although it is the most accurate. Edward Alman designed this model in 1977. With its help, you can predict bankruptcy after a fairly long period of time - five years. The forecast accuracy is 70%. For bankruptcy forecasting according to the seven-factor model, analytical data is needed, which is difficult to obtain for external users interested in the reliability and future solvency of the company.

Like almost any other tool financial analysis, it is necessary to use the Altman model, adjusted for some initial conditions. And the first thing to pay attention to is that Altman's model was developed on the basis of enterprise statistics. developed economy... How justified is the use of a formula with such weights for Russian enterprises?

Of course, this formula can be applied to any company, because it is logical to draw, for example, the following conclusion: the more independent the company is from external loans, the less likely it is to go bankrupt. But this is the problem - without having the correct numbers for the weights, we cannot predict how much less the likelihood of bankruptcy in reality will be. And, most likely, even with accurate and extensive statistics on Russian bankrupt enterprises, a confident forecast is unlikely to be possible.

Altman's approach is versatile, which has reverse side... Since the formula is derived from statistical data, it will predict in a statistical way. For the accuracy of such a forecast, homogeneous and representative data on such a phenomenon as bankruptcy are necessary. But it's not just the lack of correct statistics. When an analyst conducts an analysis, he is dealing with a specific company with its specifics to a much greater extent than with an object from a whole set of similar ones. This is precisely the disadvantage of Altman's model - it does not take into account the individuality of the company, hence there cannot be one hundred percent forecast accuracy. There are cases when an enterprise, according to all forecasts, far from bankruptcy, for one reason or another lost its position. Conversely, those who were least likely to survive survived.

You can't run a business without taking risks, otherwise you won't earn anything. At the same time, shareholders demand from the management of the company a satisfactory level of return on their capital. Depending on the specifics of the activity, market and political conditions, as well as the development strategy, the company may face various risks.

The term "risk" refers to any event or action that can prevent a company from achieving its strategic goals. Therefore, risk management is a structured and consistent approach to identifying, analyzing and managing risk that encompasses strategy, processes, people and technology.

A special place in the risk management system is occupied by financial risks... They have a significant impact on various aspects of the company's financial activities, but their most significant impact is manifested in two directions. First, the level of accepted risk has a decisive effect on the formation of the level of profitability of the company's financial operations - these two indicators are closely related and represent a single system of "profitability-risk". Secondly, financial risks are the main form of generating a direct threat of company bankruptcy, since the financial losses associated with this risk are most tangible. Therefore, almost all financial decisions aimed at generating a company's profit, increasing its market value and ensuring financial security require financial managers to possess the technique of developing, making and implementing risky decisions.

Let us dwell in detail on the issue of assessing the insolvency (bankruptcy) of a company. On October 26, 2002, Federal Law No. 127-FZ “On Insolvency (Bankruptcy)” came into effect in Russia. The law defines the concept of insolvency (bankruptcy).

Insolvency (bankruptcy) - recognized arbitration court the inability of the debtor to fully satisfy the claims of creditors for monetary obligations and (or) to fulfill the obligation to pay mandatory payments (hereinafter referred to as bankruptcy).

In accordance with paragraph 2 of Art. 3 of this law highlights the signs of bankruptcy: “ Entity is considered incapable of satisfying creditors' claims for monetary obligations and (or) fulfilling the obligation to pay mandatory payments if the corresponding obligations and (or) the obligation has not been fulfilled by him within three months from the date when they should have been performed. "

Currently, there are both Western and domestic models for predicting company bankruptcy. Let's consider the most famous of them.

The most widespread in Western methods of forecasting the risk of bankruptcy are the models developed by the famous economists Altman, Beaver, Lees and Tuffler.

I want to note right away that when developing foreign models, the entire spectrum was not taken into account. external factors risk inherent in Russian conditions: the financial situation in the country, inflation rates, credit conditions, peculiarities of the tax system, etc. Therefore, for greater objectivity, the financial condition of an enterprise must be assessed using several methods of integral assessment, including domestic models.

Altman's two-factor model

In the model, the taken into account risk factor is the possibility of non-collateralization of borrowed funds in the future period.

Z = -0.3877 - 1.0736K t + 0.0579K zs,

where K tl is the current liquidity ratio;

К Зс - capitalization coefficient.

The calculation of the coefficients included in the model is presented in table. 1. The coefficients are calculated on the basis of the "Balance Sheet" (Form No. 1).

Interpretation of results:

Z< 0 - вероятность банкротства меньше 50 % и далее снижается по мере уменьшения Z;

Z = 0 - the probability of bankruptcy is 50%;

Z> 0 - the probability of bankruptcy is more than 50% and increases as the rating number Z increases.

Altman's five-factor model

The model is used for companies whose shares are not listed on the stock exchange.

Z = 0.717X 1 + 0.874X 2 + 3.10X 3 + 0.42X 4 + 0.995X 5,

where X 1 is the difference between current assets and current liabilities / the total amount of all assets;

X 2 - retained earnings / total amount of all assets;

X 3 - profit before interest and taxes / the total amount of all assets;

X 4 - book value of capital / borrowed capital;

X 5 - sales proceeds / total assets.

The calculation of the indicators included in the model is presented in table. 2. Indicators are calculated on the basis of the "Balance Sheet" (Form No. 1) and the "Profit and Loss Statement" (Form No. 2).

Interpretation of results:

Z< 1,23 - ;

Z> 1.23 - the probability of bankruptcy is low.

Taffler's model

In general, in terms of content and a set of factor-signs, the Tuffler model is closer to Russian realities than the Fox model.

Z = 0.53X 1 + 0.13X 2 + 0.18X 3 + 0.16X 4,

where X 1 - profit from sales / short-term liabilities;

X 2 - current assets / amount of liabilities;

X 3 - short-term liabilities / amount of assets;

X 4 - sales proceeds / amount of assets.

The calculation of the indicators included in the model is presented in table. 3. Indicators are calculated on the basis of the "Balance Sheet" (Form No. 1) and the "Profit and Loss Statement" (Form No. 2).

Interpretation of results:

Z> 0.3 - low probability of bankruptcy;

Z< 0,2 - высокая вероятность банкротства.

Fox model

In this model, indicator factors take into account such performance results as liquidity, profitability and financial independence of the organization.

Z = 0.063X 1 + 0.092X 2 + 0.057X 3 + 0.001X 4,

where X 1 - working capital/ amount of assets;

X 2 - profit from sale / amount of assets;

X 3 - retained earnings / total assets;

X 4 - equity / borrowed capital.

The calculation of the indicators included in the model is presented in table. 4. Indicators are calculated on the basis of the "Balance Sheet" (Form No. 1) and the "Profit and Loss Statement" (Form No. 2).

Interpretation of results:

Z< 0,037 - вероятность банкротства высокая;

Z> 0.037 - the probability of bankruptcy is low.

Beaver model

The model makes it possible to assess the financial condition of a company from the point of view of its possible future bankruptcy.

The calculation of the indicators included in the model is presented in table. 5. Indicators are calculated on the basis of the "Balance Sheet" (Form No. 1), "Profit and Loss Statement" (Form No. 2) and "Appendix to the Balance Sheet" (Form No. 5).

The bankruptcy risk assessment scale is based on comparing the actual values ​​of the indicators with the recommended ones. The probability of a company's bankruptcy is assessed by one of the groups possible states, where most of the calculated values ​​of the indicators are located.

The specificity of Russian conditions requires that models for predicting the risk of financial insolvency take into account both the specifics of the industry and the structure of the enterprise's capital.

Two-factor bankruptcy forecasting model

This model makes it possible to assess the risk of bankruptcy of enterprises of the middle class of industrial type.

Z = 0.3872 + 0.2614K t + 1.0595K fn,

where K fn is the coefficient of financial independence.

The calculation of the coefficients included in the model is presented in table. 6. The coefficients are calculated on the basis of the "Balance Sheet" (Form No. 1).

Interpretation of results:

Z< 1,3257 - ;

1,3257 < Z < 1,5457 - вероятность банкротства высокая;

1,5457 < Z < 1,7693 - вероятность банкротства средняя;

1,7693 < Z < 1,9911 - вероятность банкротства низкая;

Z>.

Four-factor bankruptcy forecasting model

The model is designed to predict the risk of insolvency of trade and intermediary organizations.

Z = 8.38X 1 + X 2 + 0.054X ​​3 + 0.63X 4,

where X 1 - net working capital / total assets;

X 2 - net profit/ equity;

X 3 - sales proceeds / total assets;

X 4 - net profit / integral costs.

The calculation of the indicators included in the model is presented in table. 7. Indicators are calculated on the basis of the "Balance sheet" (form No. 1), "Profit and loss statement" (form No. 2) and "Statement of movement Money"(Form No. 4). Interpretation of results:

Z< 0 - вероятность банкротства максимальная (90–100 %);

0 < Z < 0,18 - вероятность банкротства высокая (60–80 %);

0,18 < Z < 0,32 - вероятность банкротства средняя (35–50 %);

0,32 < Z < 0,42 - вероятность банкротства низкая (15–20 %);

Z> 0.42 -.

Let us demonstrate the above calculations using the example of Promtekhenergo 2000 CJSC.

CJSC "Promtekhenergo 2000" is a regional representative of CJSC "ZETO" ("Plant of electrical equipment"). ZETO, being one of the leading enterprises in Russia for the development and production of electrical equipment, has mastered more than 400 items of products for various needs of the electric power industry for more than 45 years of history.

As a representative of ZETO CJSC in central region, the company CJSC "Promtekhenergo 2000" supplies equipment to power companies of all industries on the territory of the Russian Federation, as well as to enterprises in Ukraine, Kazakhstan and Uzbekistan.

To predict the risk of insolvency (bankruptcy) of the company, the accounts for 2004-2006 were used. The analysis results are grouped into tables (Tables 8–12).

Table 8. Altman's two-factor Z-model

	Index	01.01.2004	01.01.2005	01.01.2006	01.01.2007
	Current assets(current assets)
	Current responsibility
	Borrowed funds
	Total liabilities
	K 1
	K 2- capitalization ratio (p. 3 / p. 4)
	Meaning
	Evaluating Values < 0 - вероятность банкротства невелика 0 - the probability of bankruptcy is 50% > 0 - the probability of bankruptcy is more than 50%		The probability of bankruptcy is low, Z< 0	The probability of bankruptcy is low, Z< 0	The probability of bankruptcy is low, Z< 0

Table 9. Altman's five-factor Z-model

	Index	01.01.2005	01.01.2006	01.01.2007
	Current assets (current assets)
	Amount of assets *
	Borrowed capital
	Profit before tax
	Book value of capital
	Sales volume (revenue)
	K 1(p. 1 / p. 2)
	K 2(p. 4 / p. 2)
	K 3(p. 5 / p. 2)
	K 4(p. 6 / p. 3)
	C 5(p. 7 / p. 2)
	Meaning
	Evaluating Values < 1,23 - очень высокая вероятность банкротства > 1.23 - the probability of bankruptcy is low	The probability of bankruptcy is small, Z> 1.23	The probability of bankruptcy is small, Z> 1.23	The probability of bankruptcy is small, Z> 1.23

* Average values ​​are taken.

Table 10. Taffler's four-factor Z-model

	Index	01.01.2005	01.01.2006	01.01.2007
	Current assets(total of current assets) *
	Amount of assets *
	Short-term liabilities*
	Amount of liabilities *
	Profit from sales
	Sales volume (revenue)
	K 1(p. 5 / p. 3)
	K 2(p. 1 / p. 4)
	K 3(p. 3 / p. 2)
	K 4(p. 7 / p. 2)
	Meaning
	Evaluating Values < 0,2 - очень высокая вероятность банкротства > 0.3 - the likelihood of bankruptcy is low	The probability of bankruptcy is small, Z> 0.3	The probability of bankruptcy is small, Z> 0.3	The probability of bankruptcy is small, Z> 0.3

* Average values ​​are taken.

Table 11. Fox's four-factor Z-model

	Index	01.01.2005	01.01.2006	01.01.2007
	Current assets(total of current assets) *
	Amount of assets *
	Borrowed capital(sum of long-term and short-term liabilities) *
	Retained (reinvested) profit
	Market value of equity (net assets) *
	Profit before tax
	Profit from sales
	K 1(p. 1 / p. 2)
	K 2(p. 7 / p. 2)
	K 3(p. 4 / p. 2)
	K 4(p. 5 / p. 3)
	Meaning
	Evaluating Values < 0,037 - высокая вероятность банкротства > 0.037 - the probability of bankruptcy is low	The probability of bankruptcy is small, Z> 0.037	The probability of bankruptcy is small, Z> 0.037	The probability of bankruptcy is small, Z> 0.037

* Average values ​​are taken.

Table 12. Beaver's five-factor model

	Index	01.01.2005	01.01.2006	01.01.2007
	Net profit
	Depreciation
	Borrowed capital(sum of long-term and short-term liabilities) *
	Amount of assets *
	Equity
	Fixed assets
	Current assets
	Current responsibility(the amount of loans and credits, accounts payable, debts to participants for the payment of income, other short-term liabilities)
	Borrowed capital(sum of long-term and short-term liabilities)
	Values:				Characteristic
	Beaver coefficient
	Economic profitability
	Financial leverage
	Coverage ratio of assets with own circulating assets
	Current liquidity ratio
	Characteristic			Groups I, III

* Average values ​​are taken.

Below are grouped the results of the company's research on the subject of predicting insolvency (bankruptcy) based on foreign multivariate models.

Table 13. Results based on foreign multivariate models

	Assessment of indicators
Model	01.01.2004	01.01.2005	01.01.2006	01.01.2007
Altman's two-factor Z-model
Meaning
The probability of bankruptcy (Z< 0 - вероятность банкротства мала; Z = 0 - вероятность банкротства составляет 50 %; Z>0 - the likelihood of bankruptcy is high)	The probability of bankruptcy is low, Z< 0	The probability of bankruptcy is low, Z< 0	The probability of bankruptcy is low, Z< 0	The probability of bankruptcy is low, Z< 0
Altman's five-factor Z-model
Meaning
The probability of bankruptcy (Z> 1.23 - the probability of bankruptcy is small; Z< 1,23 - вероятность банкротства высока)		The probability of bankruptcy is small, Z> 1.23	The probability of bankruptcy is small, Z> 1.23	The probability of bankruptcy is small, Z> 1.23
Taffler's four-factor Z-model
Meaning
The probability of bankruptcy (Z< 0,2 - очень высокая вероятность банкротства; Z >0.3 - the likelihood of bankruptcy is small)		The probability of bankruptcy is small, Z> 0.3	The probability of bankruptcy is small, Z> 0.3	The probability of bankruptcy is small, Z> 0.3
Fox's four-factor Z-model
Meaning
The probability of bankruptcy (Z< 0,037 - высокая вероятность банкротства; Z >0.037 - the probability of bankruptcy is small)		The probability of bankruptcy is small, Z> 0.037	The probability of bankruptcy is small, Z> 0.037	The probability of bankruptcy is small, Z> 0.037
Beaver's five-factor model
Bankruptcy probability			Group II: five years before bankruptcy	Group II: five years before bankruptcy

Table 14. Two-factor Z-model for predicting bankruptcy

	Index
	Current assets(current assets)
	Current responsibility(Short-term liabilities)
	Capital and reserves
	Total liabilities
	K 1- current liquidity ratio (p. 1 / p. 2)
	K 2- financial dependence ratio (p. 3 / p. 4)
	Meaning
	Evaluating Values < 1,3257 - вероятность банкротства очень высокая 1.3257 ≤ Z< 1,5457 - вероятность банкротства высокая 1.5457 ≤ Z< 1,7693 - вероятность банкротства средняя 1.7693 ≤ Z< 1,9911 - вероятность банкротства низкая Z> 1.9911 - the probability of bankruptcy is very low	The likelihood of bankruptcy is high	The likelihood of bankruptcy is very high	The likelihood of bankruptcy is very high

Table 15. Four-factor Z-model for predicting bankruptcy

	Index	2004 year.	2005 year.	2006 year.
	Amount of assets *
	Borrowed capital(sum of long-term and short-term liabilities) *
	Net profit
	Integral costs
	Market value of equity (net assets)*
	Sales volume (revenue)
	Meaning
	Evaluating Values < 0 - вероятность банкротства максимальная (90–100 %) 0 ≤ Z< 0,18 - вероятность банкротства высокая (60–80 %) 0.18 ≤ Z< 0,32 - вероятность банкротства средняя (35–50 %) 0.32 ≤ Z< 0,42 - вероятность банкротства низкая (15–20 %)	The probability of bankruptcy is minimal (up to 10%)	The probability of bankruptcy is minimal (up to 10%)	The probability of bankruptcy is minimal (up to 10%)

* Average values ​​are taken.

Below are grouped the results of the company's research on the subject of forecasting insolvency (bankruptcy) based on domestic multivariate models.

Table 16. Results based on domestic multivariate models

	Assessment of indicators
Model	2004 year.	2005 year.	2006 year.
Two-factor Z-model for predicting bankruptcy
Meaning
< 1,3257 - вероятность банкротства очень высокая 1.3257 ≤ Z< 1,5457 - вероятность банкротства высокая 1.5457 ≤ Z< 1,7693 - вероятность банкротства средняя 1.7693 ≤ Z< 1,9911 - вероятность банкротства низкая Z> 1.9911 - the probability of bankruptcy is very low	The likelihood of bankruptcy is high	The likelihood of bankruptcy is very high	The likelihood of bankruptcy is very high
Four-factor Z-model for predicting bankruptcy
Meaning
< 0 - вероятность банкротства максимальная (90–100 %) 0 ≤ Z< 0,18 - вероятность банкротства высокая (60–80 %) 0.18 ≤ Z< 0,32 - вероятность банкротства средняя (35–50 %) 0.32 ≤ Z< 0,42 - вероятность банкротства низкая (15–20 %) Z> 0.42 - the probability of bankruptcy is minimal (up to 10%)	The probability of bankruptcy is minimal (up to 10%)	The probability of bankruptcy is minimal (up to 10%)	The probability of bankruptcy is minimal (up to 10%)

It can be concluded that, in accordance with foreign forecasting methods, the probability of bankruptcy of an enterprise is small. When using domestic methods, two opposite results were obtained: the two-factor model predicts a very high probability of bankruptcy, and the four-factor model predicts the minimum. The four-factor model is more suited to the specifics of the studied enterprise, since Promtekhenergo 2000 CJSC is a trade and intermediary company for which this model was developed. Consequently, this forecast version can be taken as a reliable one. Thus, we can conclude that the likelihood of bankruptcy of the enterprise is small.

In conclusion, I would like to note the following: the unsatisfactory structure of the balance sheet does not mean that the company has been declared bankrupt. But this should be a signal of close attention and control over the financial condition of the enterprise, taking measures to prevent the risk of bankruptcy. As possible corrective measures in such a situation for an effective exit from a crisis state and elimination of undesirable consequences, there may be:

1. Decrease accounts receivable and the duration of its turnover.
2. Decrease in overdue debt in accounts receivable.
3. Balancing receivables and payables.
4. Optimization of inventory.
5. Getting rid of non-core and unused assets.
6. Using long-term sources of capital to finance capital investments.

Only some of the possible preventive measures are reflected here, the composition of which can be expanded and changed depending on individual characteristics company and risk situation.

The Altman Z-score model is a financial model for predicting the likelihood of bankruptcy of a company, created by Edward I. Altman. Altman was a professor at the Leonard N. Stern School of Business at New York University. His work on predicting the likelihood of bankruptcy began during the Great Depression in response to a sharp increase in default rates.

Altman Model - Explanation

According to the development of Professor Altman, the Z-score provides an answer to a key question of the early 20th century. To calculate such an indicator, the professor used a weighting system in combination with a set of 4 or 5 financial ratios to predict the likelihood of a company's bankruptcy. Altman created three different Z-models, each serving a unique purpose.

Altman's original Z-model was developed in 1968. It was compiled

1) based on statistical data from state manufacturing companies

2) excluded all companies with assets less than $ 1 million

However, this original model is not intended for small, non-manufacturing or private companies. Later dr Altman developed two additional models for original Z-model... In 1983, a model was developed for private manufacturing companies and a general model for private companies, including the service sector. Various models have different variables, weights and prediction accuracy.

Altman's Model - Objective

The goal of Altman's model is to measure the financial condition of a company and predict the likelihood of bankruptcy within 2 years. Based on empirical data, it has been proven that Altman's Z-score predicts bankruptcy quite accurately in a wide variety of market situations and economic cycles. Research shows that the model has 72% -80% reliability in predicting bankruptcy. However, the Z-Score does not apply to every situation. It can only be used for forecasting if the analyzed company can be compared to the database Altman used to develop the formula.

Altman Z-Score - Formulas

In simple words, the lower the Z-score, the higher the risk of company bankruptcy, and vice versa. Different models have different overall forecast scores.

For public companies, the Z-score is calculated as follows:

1.2 * T1 + 1.4 * T2 + 3.3 * T3 + 0.6 * T4 + 1.0 * T5

T1 = working capital / total assets. This measures the size of liquid assets in relation to the total assets of a company, since a struggling firm usually experiences a lack of liquidity.

T2 = / total assets. This indicates the company's cumulative profit over the years, as the decline in profitability is a warning sign.

T3 = / total assets. This ratio shows how efficiently a company generates revenue in relation to its size.

T4 = / book value of total liabilities. Assesses how far the company is from technical default (that is, how soon its liabilities will exceed its assets).

T5 = revenue / total assets. Asset turnover is a measure of how efficiently a company is using its assets to generate sales.

Altman Z-score	Forecast
> 3	Bankruptcy is unlikely
1.8 to 3	Bankruptcy is hard to predict
< 1.8	Bankruptcy is very likely

Additional models

The practicality of Altman's original model is limited to 2 coefficients. The first is T4, the market value of capital divided by total liabilities, the second is T5 or.

Obviously, if a firm is not listed on a public exchange, it has no market value. To deal with this, there is a revised Z-score for private companies:

Z1 = 0.717 * T1 + 0.847 * T2 + 3.107 * T3 + .42 * T4 + 0.998 * T5

In this case

T4 = book value of equity / liabilities.

Another factor is the T5 asset turnover. This ratio varies considerably by industry, but since the original Z-score was based on the manufacturing sector, Altman derived a formula for non-manufacturing enterprises:

Z2 = 6.56 * T1 + 3.26 * T2 + 6.72 * T3 + 1.05 * T4

Altman's model and the global financial crisis

On the eve of the global recession of 2008-2009. credit ratings valuable papers backed by assets (in English. Asset-backed security) were rated higher than their real quality. At the same time, Altman's Z-score showed that credit risks in the financial market have increased significantly and, possibly, the level of defaults will soon increase.

According to Altman's model, the average Z-score in 2007 reached 1.81 points. The credit quality of many issuers has dropped to B on the S&P scale. About 50% of issuers had a higher rating than the credit indicators indicated.

Altman's calculations made him believe about the imminent onset of the crisis and the approaching rise in the level of defaults. Altman believed the crisis would be related to corporate defaults, but the recession was ripped apart by a collapse in the mortage-backed secutiries (MBS) market. Corporations soon began to default, too, in 2008.

conclusions

Investors should regularly check the Z-account of each of the issuers in their investment portfolio. A deteriorating Z-score may indicate impending problems, and allows for a faster analysis of the credit quality of a corporation, as opposed to a mass of indicators. Given the disadvantages, Altman's Z-score is intended to be a measure of relative financial health, not a leading indicator. Analysts at hedge funds use Altman's model as a quick check on the issuer's creditworthiness, but if the score indicates a problem, a more detailed self-analysis is recommended.

Where:

Perhaps the most popular model for predicting business bankruptcy was published in 1968 by Professor Edward Altman using a "methodological shift" - the development of the model was based on multiple discriminant analysis (MDA-analysis), which calculated the weights of the coefficients in the model. When constructing his model, Altman studied 66 American firms, of which 33 went bankrupt from 1946-1965, as well as 22 financial and economic coefficients that determine the bankruptcy of an enterprise. From this sample, he selected five key financial coefficients, on the basis of which he built a multivariate regression equation using MDA analysis. All subsequent modelers have used this toolbox and computational logic to build their models. Altman's Z-score is calculated by following formula:

Where:
A - working capital / amount of assets =

E - revenue / total assets =
<2,675).

If the indicator of the enterprise Z>

The valuesZ		Bankruptcy probability,%
1.8 and less	Very high
1.81 to 2.7
2.8 to 2.9	Possible
	Very low

490 The form 1 ) in the coefficient D.

If Z<1,23, то компания станет банкротом в ближайшие 2-3 года, если Z лежит в диапазоне от 1,23 до 2,89, то ситуация неопределенна, если Z>

Application of Altman's models for the Russian economy in transition is difficult.

This is primarily due to:

1. The difference statistical sample enterprises in the formation of a model
2. The difference in accounting for individual indicators, in the USA the system is used accounting statements according to GAAP standards
3. The model does not take into account the impact of inflation on indicators
4. Difference in book and market value of assets

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Definition

Altman Z-model(Altman Z-Score) is a financial model (formula) developed by American economist Edward Altman, designed to predict the likelihood of bankruptcy of the enterprise.

Altman Z-model formula

The formula is based on a combination of 4-5 key financial ratios that characterize the financial position and performance of the enterprise. The formula was originally proposed by Altman in the 60s of the last century.

Altman model (Z-score). Calculation example

Altman's 4-factor Z-model is used to non-manufacturing enterprises(whose shares are not listed on the stock exchange). The formula for the four-factor model is as follows:

Z-score = 6.56T1 + 3.26T2 + 6.72T3 + 1.05T4

T3 = EBIT / Assets

• 1.1 and less - "Red" zone, there is a possibility of bankruptcy of the enterprise;
• from 1.1 to 2.6 - "Gray" zone, borderline state, the probability of bankruptcy is not high, but not excluded;
• 2.6 and more - "Green" zone, low probability of bankruptcy

For manufacturing enterprises(whose shares are not listed on the stock exchange), the Altman 5-factor Z-model is used. The formula for Altman's five-factor model is as follows:

Z-score = 0.717T1 + 0.847T2 + 3.107T3 + 0.42T4 + 0.998T5

T1 = Working Capital / Assets
T2 = Retained Earnings / Assets
T3 = EBIT / Assets
T4 = Equity / Liabilities
T5 = Revenue / Assets

Interpretation of the obtained result:

• 1.23 and less - "Red" zone, there is a possibility of bankruptcy of the enterprise;
• from 1.23 to 2.9 - "Gray" zone, borderline state, the probability of bankruptcy is not high, but not excluded;
• 2.9 and more - "Green" zone, low probability of bankruptcy

Reliability of the indicator

Altman's know-how consists in the selection of indicators and, most importantly, the weights (coefficients) by which these indicators and estimates of the resulting value are multiplied in the formula. Altman made his conclusions based on the analysis of American enterprises over a number of years. In addition, there are excellent models for listed companies and non-public companies.

Due to industry specificities, differences in economies different countries, Altman's model should be used with caution, without pinning great hopes on it (especially in Russian conditions). It is recommended to draw conclusions about the financial position and the likelihood of bankruptcy of the organization not only on the basis of this indicator, but based on the results of an analysis of a wider range of indicators. In particular, the program "Your financial analyst" includes a calculation according to the Altman model, however, the final conclusion about the financial condition of the enterprise is made based on the results of the analysis and other indicators, including through forecasting their future values ​​using the linear trend method.

The works of the American scientist E. Altman became very popular in the field of predicting the risk of bankruptcy of an enterprise.

He developed a model for assessing creditworthiness based on multiple discriminant analysis, which can divide enterprises into two classes: financially stable and potential bankruptcy. This model is called the Z-score. There are two-, five- and seven-factor Z-models, as well as a five-factor modified model. In the USA, Altman's five-factor bankruptcy forecasting model is one of the main methods for diagnosing the financial stability of an enterprise.

Altman's two-factor model.
One of the simplest and most understandable models for predicting the bankruptcy of an enterprise is Altman's two-factor model, which is calculated by the formula:

Where:
A - current liquidity ratio =

B - financial independence =
In Russia, this model was studied in detail by M.A. Fedotova, who advises adding an indicator of return on assets to this model. The advantage of this model is simplicity and a small amount of necessary information. The disadvantage is the low accuracy of forecasting bankruptcy.

Altman's five-factor model (Z-score).
Perhaps the most popular model for predicting business bankruptcy was published in 1968 by Professor Edward Altman using a "methodological shift" - the development of the model was based on multiple discriminant analysis (MDA-analysis), which calculated the weights of the coefficients in the model. When constructing his model, Altman studied 66 American firms, of which 33 went bankrupt from 1946-1965, as well as 22 financial and economic coefficients that determine the bankruptcy of an enterprise. From this sample, he selected five key financial coefficients, on the basis of which he built a multivariate regression equation using MDA analysis. All subsequent modelers have used this toolbox and computational logic to build their models. Altman's Z-score is calculated using the following formula:

Where:
A - working capital / amount of assets =

B - not distributed profit / total assets =

С - operating profit / total assets =

D - market value of shares / debt liabilities =

E - revenue / total assets =
The critical value of the indicator Z = 2.675, a comparison of this critical indicator with the values ​​for each specific company will make it possible to judge the possible bankruptcy 2-3 years before its onset (if Z<2,675). Если показатель предприятия Z>2,675, then this speaks of its financial stability. In order to determine the likelihood of bankruptcy risk, you can use the following table:

Z values	Bankruptcy linguistic variable	Bankruptcy probability,%
1.8 and less	Very high	80-100
1.81 to 2.7	High	35-50
2.8 to 2.9	Possible	15-20
3.0 and up	Very low

The accuracy of the model is 95% for predicting bankruptcy in 1 year and 83% for forecasting in 2 years, which decreases with increasing forecasting horizon.
Altman's five-factor model has one drawback: it can only be used for enterprises that quote their shares on the stock market, since only for them can the market value of equity capital be obtained, in order to solve this problem Altman proposed a modified model.
Modified Altman model for companies whose shares are traded on the stock market, it looks like:

In our five-factor model formula, we replaced the market value of capital with book value of capital (p. 490 The form 1 ) in the coefficient D.
D - book value of equity / borrowed liabilities =

If Z<1,23, то компания станет банкротом в ближайшие 2-3 года, если Z лежит в диапазоне от 1,23 до 2,89, то ситуация неопределенна, если Z>2.89 - the company is financially stable.

Application of Altman's models for the Russian economy in transition is difficult. This is primarily due to:

1. The difference in the statistical sample of enterprises in the formation of the model

2. The difference in the accounting of individual indicators, in the USA the accounting system is used according to GAAP standards

3. The model does not take into account the impact of inflation on indicators

4. Difference in book and market value of assets

Nevertheless, economists from many countries who test his model in practice agree that it is universal and reliable. Having adapted the weights at the coefficients in the model for their states and industries, many economists agree on its high performance and statistical reliability. Thus, for the successful application of the Altman model in Russia, it is necessary to adjust the weights for the coefficients, taking into account the specifics of the transitional market economy.

At first, this book presents the most detailed and extensive base of approaches and methods of financial analysis of an enterprise since the 30s. the last century to the approaches of the last year 2012.The book includes the approaches of the following authors (49):

N. Ya. Petrakov;
W. Beaver;
E.A. Utkin;
E. Altman;
R. Liss;
G. Springgate;
J. Conan, M. Golder;
D. Fulmer;
J. Lego;
R. Tuffler, G. Tisshaw;
British 4-factor model of the threat of bankruptcy;
G.V. Davydova, A. Yu. Belikov;
O.P. Zaitseva;
A.V. Kolyshkin;
G.V. Savitskaya;
Model of the Belarusian National Technical University;
J. Olson;
Begley, Ming, Watts;
Ju-Ha, Tehong;
Jinglow Agorastos;
Gruzchinsky;
Lin-Piesse;
Altman-Sabato;
Minoussi, Supramanien, Worthington;
M.V. Evstropov;
Khaidarshina G.A .;
Zhdanov V.Yu .;
D. Durand;
L.V. Dontsova-N.A. Nikiforova;
A.N. Salov-V.G. Maslov;
HELL. Sheremet, E.V. Negashev, R.S. Saifulin;
R.S. Saifulin-G.G. Kadykov;
R.I. Dronov, A. I. Reznik, E. M. Bunina;
J. Argentti.

All of them are collected in the form of tables, described in detail. A critical analysis of all approaches is also presented, where their shortcomings and positive sides application.

Secondly You will save about half a year of your time. To create this collection, about 80 books and various foreign Internet sources were processed. You just need to take and use already prepared and processed information material.

Fulmer's model

bankruptcy classification was created on the basis of processing data from 60 enterprises: 30 failed and 30 normally working - with an average annual turnover of 455 thousand US dollars.

The formula for determining the probability of bankruptcy according to Fulmer's model is:

H = 5.528X1 + 0.212X2 + 0.073X3 + 1.270X4 - 0.120X5 + 2.335X6 + 0.575X7 + 1.083X8 + 0.894X9 - 6.075

where,
X1 - retained earnings of previous years / balance sheet;
X2 - sales proceeds / balance;
X3 - profit before taxes / equity;
X4 - cash flow / long-term and short-term liabilities;
X5 - long-term liabilities / balance;
X6 - short-term liabilities / total assets;
X7 - log (tangible assets);
X8 - working capital / long-term and short-term liabilities;
X9 - log (profit before tax + interest payable / interest paid).

The onset of insolvency is inevitable when H< 0 .

Calculation of components Fulmer's model according to the balance sheet:

X1 - p. 460 / p. £ 300 1;
X2 - page 010 f.2 / page 300 f.1;
X3 - p.

140 f.2 / page 490 f.1;
X4 - page 190 f.2 / (page 590 + page 690 f.1);
X5 - p. 590 / p. 300 f.1;
X6 - p. 690 / p. 300 f.1;
X7 - log (p. 300 - p.

"Altman's model by example ..."

110 p. 140 - p. 140 - p. 220 - p. 230 - p. 240 f.1);
X8 - p. 290 / (p. 590 + p. 690 f.1);
X9 - log (page 140 + page 070 / page 070 f.2).

Analysis of the models shows that:

1. the main part of the factors included in the criteria equations either coincide or are closely related to each other;
2. most of the components included in them are directly related to the volume of investments. Thus, the indicator of the value of total assets (balance sheet currency), which is included in the definition of the overwhelming majority of the components of the criteria, is functionally determined by this indicator, at least in a linear proportion.

The latter circumstance is very important, since it determines the lower limit of the rate of their growth. The components of the model themselves, in inverse proportion, depend on the value of total assets. Gross debt and the book value of debt are also linked to investment volumes, since a significant proportion of the latter is carried out through loans.

The original version of the model contained 40 coefficients, the final one uses only 9. Fulmer's model uses a large number of factors, therefore, and under circumstances other than the original, is more stable than other methods. In addition, the model also takes into account the size of the firm, which is probably true both in America and in any other country with a market economy.

The model identifies both bankrupts and solvent firms with equal reliability. At the same time, it is more correct to determine X7 in terms of asset elements in thousands of US dollars as of the date of the analyzed report. The accuracy of forecasts made using this model for a year ahead is 98%, for two or more years - 81%.

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Date of publication: 2015-07-22; Read: 1863 | Page copyright infringement

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