Question

Bankruptcy Risk and Z-Score Analysis
Following are selected ratios for JetBlue Airways for two recent fiscal years.

Ratio	2012	2011
Current ratio	0.684	1.153
Working capital to total assets	(0.072)	0.031
Retained earnings to total assets	0.061	0.043
EBIT to total assets	0.053	0.046
Market value of equity to total liabilities	0.278	0.251
Sales to total assets	0.705	0.637

Compute and interpret Altman Z-scores for the company for both years. (Do not round until your final answer; then round your answers to two decimal places.)
2012 z-score = Answer
2011 z-score = Answer

Which of the following statements best describes the company's Altman z-scores?

Both Altman z-scores are above 3.00 which indicate the company has a very high probability of bankruptcy.

Both Altman z-scores are below 1.80 which indicate the company has a very low probability of bankruptcy.

Both Altman z-scores are above 3.00 which indicate the company has a very low probability of bankruptcy.

Both Altman z-scores are below 1.80 which indicate the company has a very high probability of bankruptcy.

Answer 1

Altman Z Score is a tool for checking the credit strength test of an organisation

Altman Z Score Formula = 1.2A + 1.4B + 3.3C + 0.6D + 1E

Where, A = Working Capital / Total Assets

B = Retained earnings / Total Assets

C = Earnings Before Interest and Tax / Total Assets

D = Market Value of equity / Total liabilities

E = Sales / Total Assets

Z Score for 2011 = 1.2 x 0.031 + 1.4 x 0.043 + 3.3 x 0.046 + 0.6 x 0.251 + 1 x 0.637 = 1.0368

Z Score for 2012 = 1.2 x -0.072 + 1.4 x 0.061 + 3.3 x 0.053 + 0.6 x 0.278 + 1x 0.705 = 1.0457

Generally, Z Score below 1.8 means there is a high probability of the company going bankrupt and a score of more than 3 means there are less chances of a company going bankrupt

Hence, Both the Z Scores are less than 1.8 which indicate the company has high probability of bankruptcy