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The Ohlson O-score for predicting bankruptcy is a multi-factor financial formula postulated in 1980 by Dr. James Ohlson of the New York University Stern Accounting Department as an alternative to the Altman Z-score for predicting financial distress.
Example of an Excel spreadsheet that uses Altman Z-score to predict the probability that a firm will go into bankruptcy within two years . The Z-score formula for predicting bankruptcy was published in 1968 by Edward I. Altman, who was, at the time, an Assistant Professor of Finance at New York University.
Bankruptcy prediction is the art of predicting bankruptcy and various measures of financial distress of public firms. It is a vast area of finance and accounting research. The importance of the area is due in part to the relevance for creditors and investors in evaluating the likelihood that a firm may go bankrupt.
Updated Data, Excel Spreadsheets. Web Sites for Discerning Finance Students (Prof. John M. Wachowicz) -Links to finance web sites, grouped by topic; studyfinance.com - introductory finance web site at the University of Arizona; SECLaw.com - law of the financial markets
Consequentially, individuals have little or no way of knowing what their bankruptcy risk scores are or how to improve upon them. Furthermore, since there is no standardized index of measurement, consumers often have trouble contextualizing their score on a standardized scale, instead only receiving general information from a single bureau.
A 2024 study evaluates the formula for the U.S. market from 1963 to 2022 and compares it with the performance of the Magic Formula, Conservative Formula, and Acquirer’s Multiple. The study finds that all four formulas generate significant raw and risk-adjusted returns, primarily by providing efficient exposure to well-established style factors.
The Altman Z-score is a multivariate formula for a measurement of the financial health of a company and a powerful diagnostic tool that forecasts the probability of a company entering bankruptcy. Studies measuring the effectiveness of the Z-Score have shown that the model has an 80%–90% reliability.
Valuation formula [ edit ] Using the residual income approach, the value of a company's stock can be calculated as the sum of its book value today (i.e. at time 0 {\displaystyle 0} ) and the present value of its expected future residual income, discounted at the cost of equity, r {\displaystyle r} , resulting in the general formula: