Formulation of Altman's Index (AIN) and Financial Performance Index (FPI)

Abstract

This chapter's objectives are two-fold: first, to technically modify Altman's model and formulate Altman's index (AIN) in such a manner that only two out of five stipulated financial ratios would suffice the major purpose of projection of soundness of any business organization's financial health; and second, to formulate a financial performance index (FPI) consisting of five financial ratios treated as independent variables that would help to provide a holistic overview of a firm's performance regardless of its functional domain. Since the much-discussed and strongly valid issue of non-normality is closely associated with the financial ratios in the macroeconomic perspective (group of industries), in order to avoid the underlying controversy, the microeconomic approach is followed considering a single firm, Wal-Mart, primarily for two reasons: first, for its financial soundness and, second, it can be used for a comparative study with a financially bankrupt firm by using the financial ratios as common variables to derive the “specific” condition for bankruptcy.