The Added Value of a Business Valuation Report with Altman's Z-Score

When we hear about the value of a company, our immediate interpretation is to think of a stable, strong company that will survive for many years. History has proven that a high value means something other than a stable company. Lehman Brothers, Washington Mutual, Worldcom, and General Motors are all companies that belong to the group of biggest bankruptcies in history.

Therefore, when we examine the value of a company, we must examine another parameter, which is Altman's Z-score.

What is Altman's Z-Score?

American finance professor Edward Altman developed in 1968 a model that helps predict the survival chances of a particular company in the next two years.

The model is based on several financial ratios and has become the most common model for predicting corporate bankruptcy.

Does the Altman Model a Standard in Company Valuation Reports?

The Equitest valuation team reviewed 492 valuation reports produced by various valuation software, online valuation platforms, and reports produced by professional business valuers.

We were surprised to find that in less than 2% of the reports, the value appraiser included Altman's index as part of the analysis.

In other words, the valuation reports focus on the analysis of the company's value and less on the company's financial analysis. That is, the reports focus more on the company's value question and less on whether the company is expected to continue to exist within a year from the date of writing the valuation.

Why is it essential to also examine the company's chances of survival?

More than anything - investors hate losing. It is called LOSS AVERSION. You are an investor who wants to invest in a particular company. Business valuation reports show that the company's value is 1 million USD. You invest and get ownership of the company. How would you feel if you found that you lost all your investment only one year later?

You probably won't be able to ignore the loss. So, why do appraisers ignore Altman's Z-score model or any other survival index?

How are Equitest's valuation reports structured?

Equitest's business valuation reports include the calculation of Altman's Z score and other financial analyses.  

Including Altman's Z-score in the valuation report is something unique to Equitest.

If you would like to get a business valuation report with added value - you are welcome to use Equitest. Start for Free by clicking here.