Do you believe an Altman or Modified Altman Algorithm would be Effective as a Component of a Management Performance Measurement System? How so?
Calandro stated that Altman’s Z-score could be a good source for analyzing financial performance of an organization by testing its distress level. The Z-score model has been accepted as a financial distress model for almost four decades, leading in areas such as credit risk analysis, merger and acquisition target analysis, and turnaround management.
For credit risk analysis, the Z-score helps to score applicants that are applying for loans. For merger and acquisition, the Z-score helps to recognize companies with severe cash problems. Stock brokers use this to determine if a company is a good investment for merging and acquiring.
For turnaround management, converting barren assets into cash is serious for reducing debt and primary successful turnaround. Using computer simulation models and what-if analysis, the turnaround strategy can be depicted. The Z-Score corresponds the action plan to the management by selling off assets for company’s survival. Management concludes what level of losses can sustain as part to produce cash through asset reduction.