DEFINITION of 'Zeta Model'

The Zeta Model is a mathematical formula that estimates the chances of a public company going bankrupt within a two-year time period. The number produced by the model is referred to as the company's Z-score, and is a reasonably accurate predictor of future bankruptcy. The model is specified as:

Formula for calculating the Zeta model.

Where:
Z = Score
A = Working Capital/Total Assets
B = Retained Earnings/Total Assets
C = Earnings Before Interest & Tax/Total Assets
D = Market Value of Equity/Total Liabilities
E = Sales/Total Assets

BREAKING DOWN 'Zeta Model'

The Zeta Model returns a single number, the z-score, to represent the likelihood of a company going bankrupt in the next two years. The lower the z-score, the more likely a company is to go bankrupt. A z-score lower than 1.8 indicates that bankruptcy is likely, while scores greater than 3.0 indicate bankruptcy is unlikely to occur in the next two years. Companies that have a z-score between 1.8 and 3.0 are in the gray area, and bankruptcy is as likely as not.

The Zeta Model was developed by New York University professor Edward Altman in 1968. The model was originally designed for publicly traded manufacturing companies. Later versions of the model were developed for privately held companies, small businesses and non-manufacturing companies and emerging markets.

RELATED TERMS
  1. Fed Model

    The Fed model is a tool used to determine whether the U.S. stock ...
  2. Bankruptcy Financing

    Bankruptcy financing is financing arranged by a company while ...
  3. Voluntary Bankruptcy

    Voluntary bankruptcy is a type of bankruptcy where an insolvent ...
  4. Bankruptcy Risk

    Bankruptcy risk refers to the likelihood that a company will ...
  5. Technical Bankruptcy

    Technical bankruptcy refers to a state of either unprotected ...
  6. Robust

    Robust is a characteristic describing a model's, test's or system's ...
Related Articles
  1. Small Business

    7 Bankrupt Companies That Came Back

    Bankruptcy is often the end of a company – until it isn't.
  2. Financial Advisor

    2 Safe and Cheap Long-Term Energy Stocks

    Almost all energy-related stocks appear to be cheap right now. The key for long-term investors at this point in the market cycle is to buy those that are also safe enough to survive until commodity ...
  3. Investing

    Financial Models You Can Create With Excel

    The relatively modest amount of time it takes to build these models can pay for itself by leading you to better investment decisions.
  4. Investing

    Understanding the Black-Scholes Model

    The Black-Scholes model is a mathematical model of a financial market. From it, the Black-Scholes formula was derived. The introduction of the formula in 1973 by three economists led to rapid ...
  5. Financial Advisor

    Advisor Fees: A Look At the Retainer Model

    Financial advisors may want to become familiar with new payment models sooner rather than later in order to proactively meet market demands.
  6. Insurance

    Personal Bankruptcies Cut Almost in Half After Obamacare

    Access to health insurance many have saved many Americans from going broke.
  7. Personal Finance

    What You Need To Know About Bankruptcy

    Don't choose this last-resort option until you learn how it will affect your future.
  8. Personal Finance

    Discounted cash flows or comparables: Which to use

    DCF and comparables models are widely used in equity valuation, and here we'll explain the pros and cons of each method.
  9. Investing

    Digging Into The Dividend Discount Model

    The DDM is one of the most foundational of financial theories, but it's only as good as its assumptions.
  10. Investing

    Tesla Model 3 Delays Due to Suppliers: Oppenheimer

    The Model 3 production delays are due to a small number of suppliers, Oppenheimer said in a note to clients.
RELATED FAQS
  1. What is the difference between standard deviation and Z-score?

    Understand the basics of standard deviation and Z-score, and learn how each is calculated and used in the assessment of market ... Read Answer >>
  2. What is the difference between financial forecasting and financial modeling?

    Understand the difference between financial forecasting and financial modeling, and learn why a company should conduct both ... Read Answer >>
  3. Can personal loans be included in bankruptcy?

    Read about debts that are dischargeable when filing for bankruptcy. Learn about how personal loans are treated when filing ... Read Answer >>
Trading Center