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
New York University (NYU) is a private university, private research university in New York City, New York, United States. Chartered in 1831 by the New York State Legislature, NYU was founded in 1832 by Albert Gallatin as a Nondenominational ...
Stern Accounting Department as an alternative to the
Altman Z-score
Example of an Excel spreadsheet that uses Altman Z-score to predict the bankruptcy.html" ;"title="probability that a firm will go into bankruptcy">probability that a firm will go into bankruptcy within two years
The Z-score formula for predic ...
for predicting financial distress.
Calculation of the O-score
The Ohlson O-Score is the result of a 9-factor linear combination of
coefficient
In mathematics, a coefficient is a Factor (arithmetic), multiplicative factor involved in some Summand, term of a polynomial, a series (mathematics), series, or any other type of expression (mathematics), expression. It may be a Dimensionless qu ...
-weighted business ratios which are readily obtained or derived from the standard periodic financial disclosure statements provided by publicly traded corporations. Two of the factors utilized are widely considered to be dummies as their value and thus their impact upon the formula typically is 0.
When using an O-score to evaluate the probability of company’s failure, then exp(O-score) is divided by 1 + exp(O-score).
The calculation for Ohlson O-score appears below:
:
where
* ''TA'' =
total assets
* ''GNP'' =
gross national product price index level (in USD, 1968 = 100)
* ''TL'' =
total liabilities
* ''WC'' =
working capital
Working capital (WC) is a financial metric which represents operating liquidity available to a business, organisation, or other entity, including governmental entities. Along with fixed assets such as plant and equipment, working capital is consi ...
* ''CL'' = current liabilities
* ''CA'' =
current assets
In accounting, a current asset is an asset that can reasonably be expected to be sold, consumed, or exhausted through the normal operations of a business within the current fiscal year, operating cycle, or financial year. In simple terms, current ...
* ''X'' = 1 if ''TL'' > ''TA'', 0 otherwise
* ''NI'' =
net income
In business and Accountancy, accounting, net income (also total comprehensive income, net earnings, net profit, bottom line, sales profit, or credit sales) is an entity's income minus cost of goods sold, expenses, depreciation and Amortization (a ...
* ''FFO'' = funds from operations
* ''Y'' = 1 if a
net loss for the last two years, 0 otherwise
Interpretation
The original model for the O-score was derived from the study of a pool of just over 2000 companies, whereas by comparison its predecessor the Altman Z-score considered just 66 companies. As a result, the O-score is significantly more accurate a predictor of bankruptcy within a 2-year period. The original Z-score was estimated to be over 70% accurate with its later variants reaching as high as 90% accuracy. The O-score is more accurate than this.
However, no mathematical model is 100% accurate, so while the O-score may forecast bankruptcy or solvency, factors both inside and outside of the formula can impact its accuracy. Furthermore, later
bankruptcy prediction models such as the hazard based model proposed by Campbell, Hilscher, and Szilagyi in 2011
have proven more accurate still. For the O-score, any results larger than 0.5 suggest that the firm will default within two years.
See also
*
Altman Z-score
Example of an Excel spreadsheet that uses Altman Z-score to predict the bankruptcy.html" ;"title="probability that a firm will go into bankruptcy">probability that a firm will go into bankruptcy within two years
The Z-score formula for predic ...
*
Beneish M-score
*
Piotroski F-score
References
{{Reflist
Financial ratios
Bankruptcy
Mathematical finance
Credit risk