Zeta Model

Zeta Model

A model used to predict the likelihood that a publicly-traded company will file bankruptcy in the coming two years. The zeta model derives a company's z-score, in which a high z-score indicates low likelihood of bankruptcy. The z-score is calculated as follows:

Z-Score = 1.2a + 1.4b + 3.3c + 0.6d + e

The variables are as follows:

a: the ratio of working capital to total assets;

b: the ratio of retained earnings to total assets;

c: the ratio of EBIT to total assets;

d: the ratio of the market value of the equity to total liabilities; and

e: the ratio of sales to total assets.