FACTBOX: Facts about Altman default formula
(Reuters) -The Z-Score, a widely used formula for predicting corporate bankruptcies, has been signaling greater chances of a default by General Motors Corp GM.N since the automaker posted a $15.5 billion second quarter loss on August 1.
Here are some facts about the Z-Score and how it computes bankruptcy risk.
* Edward Altman, professor of finance at New York University's Leonard N. Stern School of Business, developed the Z-Score in 1968 to estimate bankruptcy risk at manufacturing companies.
* The score computes bankruptcy risk by looking at measures including a company's assets, liabilities, the value of its equity, earnings before interest and taxes, and retained earnings.
* In the original model, Z-Scores above 2.99 indicated a "safe" company, scores between 2.99 and 1.1 were a "gray zone," and scores below 1.1 were a "distress zone," indicating a company was vulnerable to default.
* Altman now uses the Z-Score to come up with an implied bond rating and a more precise probability of default.
* Studies have shown an accuracy rate of over 80 percent for the Z-Score. In samples of 316 bankrupt companies between 1969 and 1999, for example, 82 to 94 percent had Z-Scores below the safe zone, based on the latest financial statements before they filed.
(Reporting by Dena Aubin)
