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Old model, new tricks: Z-Score innovator and Credit Congress speaker rolls out latest vision for bankruptcy predictor.

Few things stand the test of time with few major changes, especially in business and credit. But that's exactly what the Altman Z-Score, developed by renowned New York University Professor Ed Altman, did for the better part of four decades since its creation.

To say the bankruptcy-predicting model has been used widely would be a near-epic understatement, though even Altman, who is speaking at this year's Credit Congress in Grapevine, TX, admits that some have used it incorrectly over the years. As such, the Z-Score model, which was originally intended to track the possibility of domestic manufacturing company bankruptcies, was updated and re-released in the mid-1990s. Still, it was the only major revision of the credit and accounts receivable tool since its inception ... until late 2011.

"You rarely find a model from 45 years ago still being used in its original form or a slightly revised form," said Altman. "Things usually come and go over time. People devise a better mouse trap and take over the market share. In this case, the Z-Score has survived."

That was until last year when Altman, with the help of a tech-savvy former student, recently launched the Z-Score+ in an updated format as a smart phone application compatible with the biggest brands (iPhone/ iPad, Blackberry, Android). And, while it may not be Angry Birds, as far as apps go, the Z-Score+ looks to be another game-changer from Altman.

The Altman Z-Score

Altman, the Max L. Heine Professor of Finance at the NYU Stern School of Business and director of research in credit and debt markets at the NYU Salomon Center for the Study of Financial Institutions, developed the Z-Score in 1968. Using company data and ratios based on total assets, working capital and retained earnings, among other statistics, the Z-Score was designed to assign a value to how probable a near-term bankruptcy filing was on the part of a company, primarily one in manufacturing. The scores were used and analyzed relative to three zones (safe zone, grey zone and distress zone). For example, anything below a score of 1.8 fell under "distress."


The original Z-Score has been widely referenced publicly over the years, and as recently as weeks ago when The Street, in its online publication, analyzed several solar energy product manufacturers in the wake of yet another bankruptcy filing in the sector. As reported in NACM'S eNews in January, Michigan-based Energy Conversion Devices (ECD) filed a petition for Chapter 11 protection in the U.S. Bankruptcy Court for the Eastern District of Michigan. ECD, through a subsidiary, manufactured photovoltaic products used largely in commercial rooftop solar panels. The solar products industry has been dogged of late with several high-profile bankruptcy filings, including Stirling Energy, as companies face stiff international competition, domestic market saturation and a de-prioritizing of energy efficiency-based cash outlay because of widespread economic and employment uncertainty. Using the Z-Score, The Street determined that ECD'S Z-Score was in the distressed range (1.49) and that, frighteningly, several others in the industry were much more distressed and at high risk with readings such as -7.3 and -16.5.

Altman told NACM that the timing of ECD's slip into bankruptcy seemed somewhat surprising given where it rated in the Z-Score compared to some others in the industry.

"Energy Conversion Devices didn't necessarily look like a real disaster given a score of 1.49, though we also have to look at the trending--if it's going down over a year, you have to be on guard," he said. "It was not nearly as bad as some others [in the industry]. Others are definitely in the distress zone."

The case is part of why Altman suggests bankruptcy and A/R-watchers use the updated Z-Score+ version, which takes more factors into account than the 1968 version or its mid-1990s update. The latest version has created quite a buzz since being unveiled last year, in part because of the measures not found in its predecessors.

The Next Evolution of the Z-Score: There IS an App for That

The Altman Z-Score+ was unveiled in the form of a SmartPhone/iPhone application and is also available for download to a laptop or home computer. It now includes new predictors of the one-to-10-year likelihood of default and a bond rating equivalent to match the score. On the latter, Altman noted that the previously mentioned ECD 1.49 Z-Score would likely translate into a "B-" to "CCC+" bond rating range. Some of the other scores would be well within the "D" rating area, indicating a high likelihood of default.

While not claiming at all to be on the cutting edge of technology, and even jokingly characterizing himself as a bit of a "tech-Neanderthal," Altman said the convergence of technological advances and practical business uses for them made it the right time to launch such an application, which retails around $99, but is available at a discount for NACM members. In fact, Altman noted it was a query during a question-and-answer session at an NACM affiliate event in Newport, RI last year that put the app's construction into faster motion.

"There is now a well-accepted use of apps. Since it is so ubiquitous and since the results of the model are very relevant to the average person as well as financial institutions and investors, we just thought the app would be an appropriate, easily found way to do it," he said. "I realize these things like Facebook and LinkedIn are important to a lot of people, so we're just trying to harness the communication bonanza. It is nice to get in with the modern generation"

The Z-Score+ also includes more appropriate ranges for acceptable scores based on the sector in question. For example, retailers should expect vastly different numbers than manufacturing firms--as well as measurements for companies based outside the United States, both public and private.

International information, given the ongoing problems with European Union countries like Spain and Italy and the hot growth of emerging economies in the BRICs, may be more important now for U.S.-based businesses than ever before. The new app's new capabilities feed into that growing desire on the part of business to get as much international information, especially on EU debtors, as they can.

Application of the Z-Score Incorrect

The latest Altman release is not the first time the Z-Score has gone into areas outside the scope of measuring domestic and/ or manufacturing-based companies. The '90s update (the Z-Double-Prime) included such metrics, but did not appear to be applied as widely (and correctly) as the original '68 version. It also included considerations for non-manufacturers, mainly in retail as well as for international situations. Still, Altman said improper use of the Z-Score has been an ongoing occurrence and one he hopes ceases with the advent of the Z-Score+ app.

"I found out that a lot of people that had been using my original model were using it incorrectly in their A/R function," Altman said. "That is to say they were using the classic Z-Score with scores based on the three zones (safe, grey, distressed), but they were using it based on zones established in the 1960s, and they were using it for non-manufacturers as well as manufacturing companies in the same way." Remember: the classic Z-Score only provides a score and general guidelines (trending up, trending down, zone, etc.). Strictly using the model developed almost a half-century ago instead of the newer models needs to be done with a firm grasp on context and the business of the company being measured. It's a "right tool for the right job" sort of situation, only on a much grander technological level.

The right tools:

20049. The Evolution and Importance of Corporate Distress Prediction and Financial Health Models and Their Implications

Brian Shappell, NACM staff writer, can be reached at
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Author:Shappell, Brian
Publication:Business Credit
Date:Apr 1, 2012
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