What is Your Z-Score?

With the most recent rumors indicating some big retailers are going to go bankrupt, the Z-Score has come of age. These large retailers potentially include Sears Holdings, Supervalu, Elizabeth Arden, Quantum and even Gander Mountain.

The Z-Score is quite simply this formula:

Z-Score = 1.2(working capital / total assets) + 1.4(retained earnings / total assets) + 3.3 (earnings before interest and tax / total assets) + 0.6(market value of equity / total liabilities) + 1.0 (sales / total assets)

working capital / total assets – companies with a low score here struggle to pay bills.

retained earnings / total assets – a low score here indicates its financials are tapped

earnings before interest and tax / total assets – this indicates are earnings are too small relative to size

market value of equity / total liabilities – a low score here indicates a company is using debt to finance growth (fast way to go broke in a downturn)

sales / total assets – a low score, slimier to the ratio 2 above indicates too low of revenue for its size

In total, if a company scores 2.7 or above, they are considered SAFE. Below and between 2.7 and 1.11 are in a in a GRAY ZONE and 1.1 and lower are AT RISK. Some companies will pull negatives!

The Center for Financial, Legal & Tax Planning specializes in all of these matters including business valuations and business and personal succession planning. Call us today if you have any questions at (618) 997-3436.