July / August - Minnesota Precision Manufacturing Association

ManufactuRINg | Marvels
Table 3: Interpretation of Z-score Ranges
Interpretation
Public Manufacturing
Companies
Private Manufacturing
Companies
Non-manufacturing
Companies
Appears safe for now 3.0 2.9 2.60 and above
Gray Area 1.8 to 2.99 1.25 to 2.89 1.1 to 2.59
High probability of bankruptcy 1.79 or below 1.24 or below 1.09 or below
Source: Caouette, John B; Edward I Altman, Paul Narayanan (1998). Managing Credit Risk - the Next Great Financial Challenge, John Wiley & Sons: New York.
established based on extensive research.
These are described in Table 3.
Four, not-to-be-named, public
companies were selected to illustrate
how the Z-score tool might be applied.
Admittedly, almost all companies are
showing stress during the current
difficult economy. However, there are
differences and the results of this cursory
analysis are shown in Table 4.
As can be seen from this small
sample, the range in financial stability
among growing companies is, in reality,
very substantial. All of the above
companies are established, well-known
public companies located in our region.
Some of them may be your customers.
Yet, this crude assessment would suggest
that some are far more insulated from
financial distress than others.
The Z-score should always be used
in conjunction with other information,
but it can provide a useful measure of
the credit worthiness of potential and
existing customers. PM
Although space in this article will
not permit further discussion, the author
does have some operational spreadsheet
programs that may be helpful in further
analyzing the credit worthiness of present
and future customers. These are available
for free upon request.
Table 4: A Sampling of Unnamed Local Firms
Company A Company B Company C Company D
Total Z- score 5.80 -2.30 3.46 2.12
Likelihood of
Financial Distress
Very Low Very High Low Gray Area
Dr. Fred Zimmerman
is professor emeritus
of Engineering and
Management at the
University of St. Thomas.
He can be reached at
zimco@visi.com.
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22 | PRECISION MANUFACTURING July | August 2009