Altman Bankruptcy Model

Executive Summary

I have always been interested in the stock market and potential opportunities to invest money. As such, I am always looking for ways to gather useful data that will allow me to better determine the risk associated with a particular company’s stock. While there are many ways to value a company and assess the risk associated with investing in its stock, I recently learned of an intriguing study that can accurately predict the probability that a company will go bankrupt in the near future.

This particular study was conducted Edward Altman in 1968 and its effectiveness was validated in a 2008 study. The study resulted in a formula developed by Altman which assesses the short-term liquidity and long-term solvency of a company and returns a z-score, which can be interpreted to determine whether or not a company is in danger of bankruptcy. This model has been proven to be quite successful and is able to predict with 95% accuracy if a company will go bankrupt within one year (72% accurate in two years). While this model would be irrelevant for long-term investors, it can be quite a useful tool for investors that are interested in riskier, shorter-term investments. This tool may also be used by lenders who wish to assess the credit risk of a particular firm.

In order to make this process easier, I wrote a program that pulls the data used in the calculation from the web and performs the z-score calculation. This program allows for multiple companies to be assessed at the same time.

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http://files.gove.net/shares/files/11w/thomasew/Writeup_Final.pdf