Altman modified his equation in 2000 to become:Z = .717X 1 + .847X 2 + 3.107X 3 + .420X 4 + .998X 5where X 4 is now book value of equity relative to book value of debt. The
new critical level is 2.0. We show the modified Altman Z score and its
components in Table 3.1 for JNJ for selected years during the 1970–2003
period. JNJ substantially, and consistently, outperforms the median U.S.
firm in sales efficiency, profitability, and lower leverage. The higher prof-
itability leads to much higher DuPont return on invested capital, higher re-
turn on equity, and higher Altman (new) Z score. JNJ is a quite healthy
financial firm, having a (new) Z score of 3.04.
Time Series of Ratios in the United States, 1970–2003
Is there a consistent pattern of movement in financial ratios over the
1970–2003 period? Yes, as we can see in Table 3.1. For all firms listed on
Time Series of Ratios in the United States, 1970–2003 37
TABLE 3.1 Johnson & Johnson and the Median WRDS Firm Altman Z Score and
Its Components, Selected Years, 1970–2003
Ratio 1970 1975 1980 1985 1990 1995 2000 2001 2002 2003
Johnson & Johnson
CR 3.745 2.995 2.548 2.471 1.778 1.809 2.164 2.297 1.683 1.710
SA 1.418 1.434 1.447 1.260 1.182 1.054 0.930 0.858 0.895 0.867
TDA 0.204 0.229 0.252 0.268 0.414 0.363 0.293 0.267 0.332 0.340
DuPontA0.149 0.154 0.171 0.174 0.184 0.215 0.230 0.214 0.267 0.241
ROE 0.157 0.160 0.177 0.183 0.233 0.266 0.255 0.234 0.290 0.268
NewZ 4.571 4.332 4.024 3.725 3.175 3.041 3.267 3.304 3.145 3.041
WRDS Ratios, Median Values
CR 2.027 1.965 1.829 1.768 1.620 1.727 1.672 1.585 1.580 1.703
SA 1.205 1.270 1.231 0.995 1.000 0.900 0.700 0.695 0.710 0.701
TDA 0.473 0.497 0.498 0.474 0.491 0.457 0.458 0.466 0.458 0.427
DuPontA0.061 0.060 0.074 0.055 0.044 0.060 0.037 0.027 0.037 0.047
ROE 0.100 0.104 0.128 0.098 0.090 0.098 0.075 0.058 0.073 0.083
NewZ 3.050 2.756 2.765 2.321 2.131 2.226 1.806 1.666 1.639 1.752
N 3,524 5,559 5,444 5,239 6,107 7,972 7,826 7,309 6,732 5,484
CR—Current ratio.
SA—Sales/assets.
TDA—Total debt/assets.
DuPontA—DuPont analysis.
ROE—Return on equity.
NewZ—Altman Z model.
N—Number of firms.