In: Accounting
Compute and Interpret Altman's Z-scores
Following is selected financial information for Netflix, for 2018 and 2017.
$ thousands, except per share data | 2018 | 2017 |
---|---|---|
Current assets | $9,694,135 | $7,669,974 |
Current liabilities | 6,487,320 | 5,466,312 |
Total assets | 25,974,400 | 19,012,742 |
Total liabilities | 20,735,635 | 15,430,786 |
Shares outstanding | 436,598,597 | 433,392,686 |
Retained earnings | 2,942,359 | 1,731,117 |
Stock price per share | 267.66 | 191.96 |
Sales | 15,794,341 | 11,692,713 |
Earnings before interest and taxes | 1,605,226 | 838,679 |
Compute and interpret Altman Z-scores for the company for both
years. (Do not round until your final answer; then round your
answers to two decimal places.)
2018 z-score = Answer
2017 z-score = Answer
Which of the following best describes the company's likelihood to
go bankrupt given the z-score in 2017 compared to 2018.
The z-score in 2018 increased. Z-scores for both years are in the gray area indicating some risk of bankruptcy.
The z-score in 2018 increased, which suggests the company's risk of bankruptcy has increased.
The z-score in 2018 increased. Z-scores for both years indicate low bankruptcy potential in the short term.
The z-score in 2018 decreased, which suggests the company's risk of bankruptcy has decreased.
Altman Z score of a company is calculated using the following formula
Z score = ( 1.2 x A ) + (1.4 x B ) + (8.3 x C ) + (.6 x D ) + (1.0 x E)
Where
A = Working Capital / Total Assets
B = Retained Earning / Total Assets
C = Earning before Interest and tax / Total Assets
D = Market value of equity / Total Liabilities
E = Sales / Total Assets
For Year 2018
Z score is calculated as follows
Z score = ( 1.2 x .12) + (1.4 x .11) + (3.3 x .06) + ( .6 x 5.63) + (1.0 x .60) = 6.256
Where
A = Working Capital / Total Assets = 3206815/ 25974400 = .12
Working capital = Current Assets - Current Liabilities = 9694135 - 6487320 = 3206815
B = Retained Earning / Total Assets = 2942359 / 25974400 = 0.11
C= Earning before Interest and tax / Total Assets = 1605226 / 25974400 = .06
D = Market value of equity / Total Liabilities = (Share outstanding x Stock price per share ) / Total Liabilities = (436598597 x 267.66) / 20735635 = 5635.70 = 5.63 ( in thousands $)
E = Sales / Total Assets = 15794341 / 25974400 = 0.60
For year 2017
Z Score = (1.2 x 0.11) + ( 1.4 x 0.09) + ( 3.3 x 0.04) + ( 0.6 x 5.39) + ( 1.0 x .61) = 4.23
A = Working Capital / Total Assets = 2203662/ 19012742 = .11
working capital= Current Assets - Current Liabilities = 7669974 - 5466312 = 2203662
B = Retained Earning / Total Assets = 1731117 / 19012742 = .09
C = Earning before Interest and tax / Total Assets = 838679 / 19012742 = 0.04
D = Market value of equity / Total Liabilities = (191.96 x 433392686) / 15430786 = 5391.43 = 5.39 ( in thousand $ )
E = Sales / Total Assets = 11692713 / 19012742 = 0.61
2018 z Score = 6.25
Interpretation - Since the z Score >= 3.0 based on tge financial data the organisation is most likely safe.
2017 z Score = 4.23
Interpretation - here also z score >= 3.0 based on the financial data so the organisation is most likely safe.
The z-score in 2018 increased. z-scores for both years indicate low bankruptcy potential in the short term.
On comparing companies z score in 2018 with its z score in 2017 following option best describes tge company likelihood to go bankrupt
The z Score in 2018 increased. z score for both year indicate low bankruptcy potential in short term.