Evaluate the extend to which Altman's Z Score and Argenti's A Score Essay

Evaluate the extend to which Altman's Z Score and Argenti's A Score become useful to different groups in the society and also comment on the extend to which the - Essay Example Ratio between 1.8 and 3.0 are considered in the gray area of the scale, the closer it gets to the 1.8 barrier the greater the risk of the company going bankrupt. The Z Score model which was created by Edward Altman in the 1960s is pretty accurate in real world application the model was able to successfully predict 72% of corporate bankruptcies two years prior to the companies filing for chapter 7 (Investopedia, 2008). The Altman Z Score tool integrates know financial ratios into the equation whose utilization in the equation give the predictor credibility among the financial industry users. Professor Altman used the Z-score tool he created to develop a model differentiating companies with high probabilities of bankruptcy from companies that are not prone to this type of hazard. Altman’s Z Score determines the likelihood of bankruptcy by utilizing five metrics commonly used by financial analyst to determine five particular financial ratios. The data to the financial ratios is directly extracted from the financial statements of a company. The five variables composed of financial ratios that make up the formula are illustrated below: The metrics involved in the formula are derived from the Income Statement and Balance Sheet financial statements of a company. The tool is both applicable to financial statements of manufacturing and non-manufacturing corporations. The Z-score model substitutes the book value of equity (owner equity) for market value in X and thus it can be used to evaluate privately and publicly held firms on an equal basis (EPA, 2000) The Altman’s Z score is a useful tool for the banking industry. Banks have to make decision on the credit worthiness of corporation in order to determine if a company is eligible for bank loans, credit lines or vehicle financing among others. By utilizing the Z Score tool the bank would know that if a company scores in the low 2 the enterprise is high risk type endeavor.