Evaluation of the revised Z'-score model as a predictor of a company's financial failure

Abstract

Under contemporary business conditions, there are numerous models used for the assessment of a company's financial situation and the prediction of the likelihood of its bankruptcy. These models have been mainly developed using the company's financial information. One of them is the Altman Z-score model. The model separates financially successful and stable companies from those having difficulties in business and headed for bankruptcy. This paper explains the importance of prudential information, basic financial statements and financial indicators and presents the research aimed at evaluating the applicability of the revised Altman Z'-score model in the Federation of Bosnia and Herzegovina (FBiH). Based on financial information, the paper analyzes the business activities of 50 large manufacturing companies in FBiH. The revised Z'-score model achieved a relatively good result in assessing the companies with business difficulties as it correctly classified 10 out of 20 companies; the other 10 companies were not incorrectly classified into the companies with the stable business but they were placed in the grey zone. The model proved completely reliable in the classification of all 30 companies with stable businesses. The research results indicate that the revised Altman Z'-score may be used as the predictor of the financial failure of manufacturing companies in FBiH. This model is definitely the tool that may assist while making business decisions. However, due to the specific business environment in FBiH, the model is recommended to be used as an additional rather than the basic indicator for predicting financial failure.