Question

What information might you use, besides its financial statements, when analyzing an organization's financial health? What is a company's "z-score," and what does it tell you? Be specific, and identify the usefulness of the information that you identify. Cite any references used.

Answer 1

Investors have to look at its financial position to understand and value a company. Fortunately, it is not as difficult as it sounds to perform a financial analysis of a company by examining its financial statements. If you borrow money from a bank you have to list the value of all of your significant assets, as well as all of your significant liabilities. Your bank uses this information to assess the strength of your financial position. Evaluating the financial position of a listed company is quite similar, except investors need to take another step and consider that financial position in relation to market value. Let us take look.

Balance sheet: Like your financial position, a company’s financial situation is defined by its assets and liabilities. A company’s financial position also includes shareholder equity. All of this information is presented to shareholders in the Balance Sheet.

Current assets and liabilities: Assets and liabilities are broken into current and non-current items current assets or current liabilities are those with an expected life of fewer than 12 months. For example, suppose that the inventories that the outlet reported as of December 31,2018, are expected to be sold within the following year, at which point the level of inventory will fall and the amount of cash will raise. Current liabilities are the obligations the company has to pay within the coming year and exclude existing obligations to suppliers, employees, the tax office and providers of short term finance. Companies try to manage cash flow to ensure that funds are available to meet these short-term liabilities as they come due.

Financial position: Book value, if we subtract total liabilities, we are left with shareholders equity. Essentially this is the book value or accounting value of the shareholders stake in the company. It is principally made up of the capital contributed by shareholders over time and points earned and retained by the company, including the portion of any profit not paid to shareholders as a dividend.

Determining what can be defined as a high or low market to book ratio also depends on comparisons. A company’s financial position tells investors about its general wellbeing. A financial analysis of a company’s financial statements I long with the foot notes in the annual report is essential for any serious investor wanting to understand and value a company properly.

The Z – Score is a financial static that measures the probability of bankruptcy. The Z-Score is used to predict the likelihood that a company will go bankrupt. A company’s Z-Score is calculated based on basic indicators found on its financial statements. Lower and negative Z-Scores indicate a higher likelihood that a company will go bankrupt , where as higher and positive scores indicates that a company will survive.

To illustrate, suppose company XYZ is given a Z-Score of 3 and that company ABC is given a Z – Score of 1. Of these two , company ABC has the greater likelihood of going bankrupt, why because the Z-Score serves as a critical indicator of a company’s financial health and likelihood to survive. Therefore , the Z-Score is important in auditing as well as analyzing credit.

Z Scores are measures of an observation’s variability and can be put use by trades in determining market volatility. The Z scores is more commonly known as the Altman Z-Score. The calculation used to determine the Altman Z-Scores is as follows:

Z = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

Z = The Altman Z score, A= Working capital , B= Retained earnings, C=Earnings before interest and tax, D= market value of equity , E= Sales.

Finally Z – Scores can swing from quarter to quarter when a company records one time write – offs. These can change the final score, suggesting that a company that’s really not yet risk is on the brink of bankruptcy.