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Altman Z Score

The document summarizes a study that applied Altman's Z-score model to predict bankruptcy for selected manufacturing and non-manufacturing firms over 5 years. The study found that most firms were in the distress zone, indicating a risk of future bankruptcy. Only one firm, ACC Cement, consistently scored in the gray zone of financial stability. The Z-score model can help identify firms at risk of bankruptcy so management can take steps to improve financial performance and reduce insolvency.

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Sagar Naresh
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440 views15 pages

Altman Z Score

The document summarizes a study that applied Altman's Z-score model to predict bankruptcy for selected manufacturing and non-manufacturing firms over 5 years. The study found that most firms were in the distress zone, indicating a risk of future bankruptcy. Only one firm, ACC Cement, consistently scored in the gray zone of financial stability. The Z-score model can help identify firms at risk of bankruptcy so management can take steps to improve financial performance and reduce insolvency.

Uploaded by

Sagar Naresh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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PREDICTING BANKRUPTCY OF

SELECTED FIRMS BY APPLYING


ALTMAN’S Z-SCORE MODEL
Author : Prof. Rohini Sajjan

Published in : International Journal of Research


- Granthalayaa

Reviewed By:
Sagar Naresh
TPS-25-082
Major (Finance)
ABSTRACT
Predication of Bankruptcy is critical task. Early stage of
identification of likelihood of solvency may avoid evils in the near
future & may shelter the firm from Bankruptcy situation. Bankruptcy
of organizations can be predicated by using Altman’s Z-Score
Model. This study tries to apply the model to understand the
likelihood of Bankruptcy of selected firms for past 5 years from
2011 to 2015 which are listed in BSE & NSE. Companies are
selected from manufacturing & non-manufacturing sector. The
study reveals that none of the companies completely belongs to
Safe Zone except for few years. Most of the firms are in Distress
Zone which clearly indicates that these firms may go Bankrupt in
near future.
INTRODUCTION
 There are always ups and downs in the stock market. A stock price
that changes quickly and by a lot is more "volatile”.
 One important tool that predicts the volatility and has gained
popularity since 1985 is Edward Altman’s Z – Score Model (Altman,
1968).
 It is a multivariate formula used for the measurement of the
financial health.
 It has gained wide acceptance with a variety of stake holders like
investors, financial analysts, consultants, bankers, auditors,
management accountants, courts, and database systems.
 The Altman Z-score is a widely used measure that applies an
algorithm that has been found to have useful predictive value on
the likelihood of a business going bankrupt.
OBJECTIVE OF THE STUDY

This study intends to estimate likelihood of Bankruptcy of selected


firms by applying Altman’s Z-Score Model
ALTMAN Z-SCORE
• Z- score formula was developed by Edward Altman, Assistant Professor
of Finance at New York University. The score predicts the bankruptcy or
the likelihood of financial distress within two years of the company and
was first published in the 1968.
• The score tries to predict probability of default by the companies due to
the financial distress based on the current financial statistics of the
company.

The Z-score formula for the manufacturing companies is:

Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1X5


While

Z > 2.99 are considered in 'Safe' Zones


1.81 < Z < 2.99 are considered in 'Grey' Zones
Z < 1.81 are considered in the 'Distress' Zones
Z-SCORE FORMULA FOR NON-
MANUFACTURING FIRMS
Z-Score bankruptcy model:

Z = 6.56X1 + 3.26X2 + 6.72X3 + 1.05X4


Where,
• X1 = (Current Assets − Current Liabilities) / Total Assets
• X2 = Retained Earnings / Total Assets

• X3 = Earnings Before Interest and Taxes / Total Assets


• X4 = Book Value of Equity / Total Liabilities

Zones of discriminations:
• Z > 2.6 -“Safe” Zone
• 1.1 < Z < 2.6 -“Grey” Zone
• Z < 1.1 -“Distress” Zone
DATA COLLECTION
MANUFACTURING COMPANIES

• ACC Cement Ltd (Generated Profits in all 5 years)


• Hindustan Machine Tools Ltd (HMT) (Incurred Losses in all 5 years)

• Adani Enterprise Ltd (Generated Profits in few years & Losses in few years)

SERVICES COMPANIES

• Axis bank (Generated Profits in all 5 years)


• Mahanagar Telephone Nigam Limited (MTNL) (Incurred Losses in all 5
years)

• SKS Micro Finance (Generated Profits in few years & Losses in few years)
DATA ANALYSIS
MANUFACTURING COMPANIES
DATA ANALYSIS
MANUFACTURING COMPANIES
DATA ANALYSIS
SERVICES COMPANIES
DATA ANALYSIS
SERVICES COMPANIES
DATA ANALYSIS
Z- Value FIRMS CLASSIFICATIONS
DATA ANALYSIS
Z- Value FIRMS CLASSIFICATIONS
INTERPRETATION

• The tables show that from the selected sample of 6 companies


3 companies are in Distress Zone namely HMT, Adani
Enterprise & MTNL.
• Z Value of Axis Bank also falls under Distress Zone except for
the year 2012. This indicates the poor financial performance of
the bank.
• SKS Micro Finance shows mixed zones of Z Value.
• Among the selected sample only ACC is performing
consistently which is in Gray Zone
CONCLUSION
This study investigated the applicability of the Altman’s bankruptcy
model to examine the financial soundness of the firms belonging to
the manufacturing & non-manufacturing firms. The study covers the
6 companies & 5 years of time frame from 2011-2016. According to
findings unfortunately, none of the companies completely belongs
to Safe Zone except for few years. Most of the firms are in Distress
Zone which clearly indicates that these firms may go Bankrupt in
near future. It’s up to top level management to design effective
strategies for better control & management of resources. This may
result in win-win situation for both management & investors.

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