The Use Of Altman Equation For Bankruptcy Prediction In An Industrial Firm (Case Study)

Abstract

Financial analysis provides the basis for understanding and evaluating the results of business operations and explaining how well a business is doing. In addition, the financial statement analysis can help creditors, investors, and managers answer the following questions: Can the company pay the interest and principal on its debt? Does the company reply too much on non-owner financing? Does the company earn an acceptable return on invested capital? Is the gross profit margin growing or shrinking? Does the company effectively use non-owner financing? Are costs under control? Is the companys market growing or shrinking? Do observed changes reflect opportunities or threats? Is the allocation of investment across different assets too high or too low? Furthermore, financial statement analysis reduces our reliance on hunches, guesses, and intuition. Above all, it reduces risk and/or uncertainty in decision making. Therefore, to reduce risk, uncertainty, and avoid bankruptcy one must appreciate the usefulness of financial statement analysis by using some tools and techniques to evaluate and project the future performance of the firm within a given industry.The researchers used the Altman z-score analysis to predict a firms insolvency. The study results for the period 2002-2004 indicated the weaknesses of Jordan Establishment for Marketing Durable goods. The z-score from the analysis (for the given period) was less than 1.81 (z-score <1.81).Evidence suggests that the firm has increased its debt and will be facing bankruptcy in the near future. In liquidity ratios, the percentage of the working capital is less than 1, indicating an increase in liabilities over assets. Leverage ratios increased from 41.7% to 56.7%, while inventory turnover decreased by 1.2 times through the given period. Net profit to total sales reduced from (1.3) to (1.8) for the same period. Also, the assets return percentage declined from (-9.29%) to (-10.3%), while the stock book value declined from (0.95) JD to (0.67) JD through the given period. The main features provide a gloomy picture and indicate inefficiencies within the firm.