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 research university in New York City. Chartered in 1831 by the New York State Legislature, NYU was founded by a group of New Yorkers led by then-Secretary of the Treasury Albert Gallatin.
In 1832, the ...
Stern Accounting Department as an alternative to the
Altman Z-score
Example of an Excel spreadsheet that uses Altman Z-score to predict the probability that a firm will go into bankruptcy within two years ">bankruptcy.html" ;"title="probability that a firm will go into bankruptcy">probability that a firm will ...
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 multiplicative factor in some term of a polynomial, a series, or an expression; it is usually a number, but may be any expression (including variables such as , and ). When the coefficients are themselves var ...
-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
In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can b ...
* ''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 any asset which can reasonably be expected to be sold, consumed, or exhausted through the normal operations of a business within the current fiscal year or operating cycle or financial year (whichever period is ...
* ''X'' = 1 if ''TL'' > ''TA'', 0 otherwise
* ''NI'' =
net income
In business and 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, interest, a ...
* ''FFO'' = funds from operations
* ''Y'' = 1 if a
net loss Under U.S. Federal income tax law, a net operating loss (NOL) occurs when certain tax-deductible expenses exceed taxable revenues for a taxable year. If a taxpayer is taxed during profitable periods without receiving any tax relief (e.g., a refund ...
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
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 a ...
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 probability that a firm will go into bankruptcy within two years ">bankruptcy.html" ;"title="probability that a firm will go into bankruptcy">probability that a firm will ...
*
Beneish M-score
The Beneish model is a statistical model that uses financial ratios calculated with accounting data of a specific company in order to check if it is likely (high probability) that the reported earnings of the company have been manipulated.
How to ...
*
Piotroski F-score Piotroski F-score is a number between 0 and 9 which is used to assess strength of company's financial position. The score is used by financial investors in order to find the best value stocks (nine being the best). The score is named after Stanford ...
References
{{Reflist
Financial ratios
Bankruptcy
Mathematical finance
Credit risk