Due diligence unlocks smarter investment decisions.
Sarah and Tom were captivated by a charming Victorian in a rapidly gentrifying neighborhood. The price was right, but the development company behind the renovations had a limited track record. They risked losing their $10,000 earnest money deposit and facing substantial legal fees if the company went bankrupt before completing the project, potentially costing them upwards of $50,000 considering the price increase if they had to find a similar property later.
By using the Altman Z-Score Calculator, Sarah and Tom analyzed the developer's publicly available financial statements. The Z-Score indicated a high probability of financial distress within the next two years. This red flag prompted them to renegotiate the contract with a strong contingency clause protecting their deposit or, ultimately, to walk away from the deal and find a more stable investment opportunity, potentially saving them $50,000.
The Altman Z-Score calculation uses publicly available financial ratios like working capital to total assets, retained earnings to total assets, earnings before interest and taxes to total assets, sales to total assets and equity to debt. This score indicates the likelihood of bankruptcy.
$50,000 avoidance of potential losses by identifying high-risk developer.
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