10th International Conference on Business Management - 2013
The table 1 describes the interpretation of estimated Z score of each firm.
and capital structure, the common variables included in the Z models are not appropriate for banks, finance companies and other similar firms.
Table 1: Interpretation of Z Scores. Model 01 Z Z < 1.81 1.81 < Z < 2.99
Model 02 Z’’ Z < 1.1 1.1 < Z < 2.6
Indication
RESULTS Descriptive statistics of the variables (i.e. the financial ratios of model 1 & 2) are presented in the table 2. The mean, deviations and error are grouped according to the classification of the model: failed, gray area and safe firms. On average, working capital, retained earnings and current earnings relative to total assets (X1, X2 & X3) are negative in failed firms, discriminating the other two groups. The safe firms’ market value of equity compared to total liabilities (X4) significantly higher, perhaps due to the market confidence. However, it fetches a higher deviation from the mean.
Failed firms Uncertain (Gray Area) 2.99 < Z 2.6 < Z Safe firms This table gives the classification guide based on the z score of individual firm.
Sample: John et.al (2001) state that even though developed in 1968 using a small sample of firms (33 insolvent companies) from the 1950s and 1960s, Altman’s Z-score model remains a commonly used tool for evaluating the financial health of companies. The present study examines 67 public companies in Sri Lanka, those listed in Colombo Stock Exchange during the period 2008 to 2012 in order to identify financially distressed firms. Accordingly, the study identified 16 companies whose auditors have modified their report on going concern appropriateness based on continuous losses and liquidity conditions and the firms with negative net assets that indicate financial distress (see: table 6). The study also used a further sample of 51 public companies to pair with the distressed firms, considering the similarity in sector, size and operations. This exercise resulted in a total sample of 67 companies covering the sectors; manufacturing, food & beverage, hotels, service, diversified, health, chemical and property. The firm identity is not disclosed due to unavailability of permissions. The study has excluded companies that were listed for less than four years in view of several factors that affect to the performance of the firms other than operational activities. Banks and other financial institutions were not included in the sample due to comparability difficulties with differences in asset
[Table 02] The Z-score of the safe firms display a significant difference from other two groups. Hence it is interesting to observe the statistical significance between group means. The table 3 depicts the results of application of independent sample t tests in achieving this objective. The panel A gives the mean differences and their significance, the two samples being the failed firms and the firms in the gray area. Similarly, the panel B gives the mean differences between the safe firms and the firms in the gray area. The variables X1, X2 and X3 display significant mean differences at 1% level while X5 at 5% level. Market value (X4) do not show a significant difference as it has a higher deviation from the mean. [Table 03] The final outcome in this test is that the Z-score is highly significant in
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