Makerere University Business School: Accounting Department: BSA 3

Illustrations: Altman’s Z score – Reference Jan. 10th 2022

KLME Ltd is a manufacturer of school shoes with a number of distribution outlets in the
East African region. Their business commenced in 1985 and they have had no disruption
since then. Their profitability levels too has been good in that they have been able to
employ more staff and increase their production. However, KLME has approached their
bankers to get a loan facility to help them boost working activities since the schools were
due to open; implying that parents would be able to buy shoes for their students going
back to school. But the bankers feel that, with the recent prolonged closure of schools
causing a very big impact on the company profitability levels; and coupled with Covid -
19 uncertainties for the immediate future, further analysis regarding the survival of the
company was required.

Additional information reveals that: Their total assets are worth $2,500,000 while they
have a working capital of $3,200,000. Their liabilities stand at $4,000,000 while retained
earnings amount to $700,000. Earnings Before Interest and Tax come to $4,500,000.
Sales total $7,200,000 while the market value of equity is $6,000,000.

Compute the KLME Altman z-score as part of the quantitative analysis aiding decision
making.

Altman Z Score = (1.2 x A) + (1.4 x B) + (3.3 x C) + (0.6 x D) + (0.999 x E)

Illustration 2:

The following extracts relate to 5 manufacturing companies: The figures in the table are
in US$ ‘000.

CO.1 CO.2 CO.3 CO.4 CO.5

Net Sales 7,965 8,922 10,521 6,836 10,101
Retained earnings 1,195 1,338 1,578 1,025 1,515
Earnings before interest and Tax 1,673 1,820 2,105 1,308 2,075
1,59 1,64 1,99 1,15 1,85
Net working Capital 3 5 5 0 0
1
Asset  9,956 1,000  12,050  8,500  9,895
Long Term Loan 1500 1600 700 900 1200

Additional notes:
1. The market value of Equity for Co. 2 was $ 4,700,000; Co.4-C was $10,000,000,
Co.1 was $ 4,400,000 whereas companies 3 and 5 had similar equity market value
at $ 6,400,000.
2. Additional short term loans for was as follows: Co 1: $600,000; Co.2: 460,000;
Co.3: 350,000; Co.4: 500,000 and Co.5: 400,000.
3. The Formula for the Z score is given as:
Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 +1.0X5
Where; X1 = working capital/total assets, X2 = retained earnings/total assets, X3 =
earnings before interest and taxes/total assets, X4 = market value equity/book
value of total liabilities, and X5 = sales/total assets
Required:

a) Basing on the information given above compute the Z score for each of the
company and interpret the results in line with Altman’s performance guidelines.
b) Give advise on performance of the companies and which 2 best companies would
best be invested in and state why so.