Answer to Question #165979 in Management for Johnson

Question #165979

From the 2019 Aluworks Annual report, are there specific indicators that show that the company is in distress?

Use the Altman Z-Score and any other information available in the report including

financial statements and any other specific statements from key stakeholders that show

whether Aluworks is in a distress situation or not.

Expert's answer

Altman’s Z-score is expressed by the equation below

ζ = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

The value of Z-score ranges from zero to four partitioned by zones which represent the extent of insolvency of firm.

Distress zone is marked with amber color and ranges from 1 to 1.8, grey zone (1.8-3.0) and safe zone which is green (3.0- 4.0)

  • Zeta (ζ) is the Altman’s Z-score
  • A is the Working Capital/Total Assets ratio
  • B is the Retained Earnings/Total Assets ratio
  • C is the Earnings Before Interest and Tax/Total Assets ratio
  • D is the Market Value of Equity/Total Liabilities ratio
  • E is the Total Sales/Total Assets ratio

Based on assumptions about the financial report of Aluworks Annual report with the figures.

Assuming that the values of A, B, C, D and E are 0.8, 0.1, 0.4, 0.3 and 0.2 respectively.

The Z-score shall then be calculated using the equation as follows:

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

and the Z-score shall be = 2.8 indicating that the company is bankrupt and is at distress zone.


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