Predicting Financial Stability of Select BSE Companies Revisiting Altman Z Score

Abstract

In the era of globalization, prediction of financial distress is of interest not only to managers but also to external stakeholders of a company. The stakeholders are continuously seeking the optimal solution for performance forecasting, as a way to rationalize the decision-making process. The recent past shows that financial stability of companies is at the stake. Stockholders, Managers, Creditor and employees of the business are always concerned about financial stability of the companies. The most frequently tool for financial analysis is financial ratios. However, financial ratios are no-longer proved appropriate for „Stockholders‟ equity position and creditors‟ claims. Stakeholder‟s have concerns about the consequences of financial distress for companies, and controls of capital adequacy through the regulatory capital requirement (Mingo, 2000). This shared interest creates persistent investigations and continuing attempts to answer an incessant question that how financial distress can be predicted, or what reveals the credit risk of firms. For this purpose most commonly used tool is Altman Z score, but due to nature of the explanatory variables, financial distress prediction research has not reached an unequivocal conclusion. The primary goal of this paper is to analyze and reexamine the Altman Z score. In order to facilitate the current research, various ratios were taken from Altman‟s Z score. To fulfill our objective Z score ratios were used to divide sample firms into healthy and unstable among BSE-30 companies. First the Z score is calculated for 10 companies selected for this purpose for a period of 5 years each. And then it is divided as per z scores, later the significant in the changes in the ratio is calculated with the help of One sample Komogrov-Smirnow test, which resulted that the change in the z scores is not significant in case of all the companies.