Posted by: Hysam Darwan | December 30, 2015

Early Warning Signs of Decline and Failure of a Business

One of the methods to predict whether your company has the potential to decline or fail is using the Z-Score method. The formula is as follows:

Z-score method,

If Z<1.8, the firm is classified as at a high likelihood of failure. Conversely, a score above 3.0 indicates that that bankruptcy is unlikely.

Z = 1.2A + 1.4B + 3.3C + 0.999E

A = Working Capital/Total Assets

B = Retained Earning/Total Assets

C = Earnings before Interest and Taxes/Total Assets

D = Market Value of Equity/Book Value of Total Debt

E = Sales/Total Assets

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