If we look at Altman Z-score, we will find that using this equation has a different ranges and each range indicates to a particular status of the company's financial future. For example: The company is predicted to go bankrupt if the score is below 1.81. A score between 1.81 and 2.99 belongs to a grey area. If the score below 2.675, there are 95% chances that the company will go bankrupt. A score of 3.0 or more indicates a low risk of bankruptcy.
On the other hand, when applying z-score (The z-score is defined as z ≡ (k+µ)/σ, where k is equity capital as percent of assets, µ is return as percent of assets, and σ is standard deviation of return on assets as a proxy for return volatility) to measure banking stability, we can not find any range of the results come out from this formula by almost all the studies (for example 1= is instable, 3= is stable). I went through many researches and studies but I have not found any clear explanation of the z-score's range. That is why I am asking this question, hopefully I will get an answer from you.
Thanks for your reading to my question
Regards
I think it is important to highlight that the Altman Z-Score cannot be really compared to the z-score defined as (x-\mu)/\sigma . Moreover, I think it is important to highlight that the Altman Z-Score was calibrated too long ago. Therefore, I would be really careful in applying it nowadays, since companies tend to be structured in a very different way.
If I am well informed there is not only one Z score. Perhaps look it up in some high level finance text books. The other z I do not really understand … what is the link? Please explain.
good luck
Z score is based on economic research of the past, so a very bad forecaster
Jan Jansen What I see from the literature this indicator is most commonly used to evaluate the stability of the banking system. Kindly check this website:
https://www.worldbank.org/en/publication/gfdr/gfdr-2016/background/financial-stability
Please have a look into the books of Brealy & Meyers; Van Horne
All are standard textbooks of finance ... they have in common, that Altmann's Z- score is based on past data ... and thus not so a good forecaster
Banks like the Worldbank or BIS use these models as a rule of thumb for their stress tests
Z-score according Van Horne is something else: (NPV* - NPVe) / SDnpv
So your formula is unknown to me
The problem you have is the one of model calibration. The Altman Z-score model, as it is right now, is outdated because its parameters are no longer relevant to the realities of today's banks or financial institutions. To be able to effectively use the model today, you must first recalibrate it, that is re-estimate all the parameters of the model with today's real data. To have stable parameter estimates, you should use out of sample data in your estimation. Once the Altman Z-score model is properly calibrated, it can be used to measure the stability of a large sample of banks and come out with a new stability metric or rule for banks.
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