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The Z Score: A Critical Analysis Of Altman's Z Score

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The Z Score: A Critical Analysis Of Altman's Z Score
Altman's Z Score:
The Z score, developed by Professor Edward I. Altman, is perhaps the most widely recognized and applied model for predicting financial distress (Bemmann, 2005). Altman developed this intuitively appealing scoring method at a time when traditional ratio analysis was losing favor with academics (Altman, 1968). In his seminal paper, Altman evaluated 22 potentially significant variables of the 66 firms by using multiple discriminant analysis to build the discriminant function with five variables. This model was later modified to Altman model (1993) that uses the same variables multiplied by different factors. Altman Z-Score is a quantitative balance-sheet method of determining a company's financial health.
The Z scores formula …show more content…
This gives an indication of how much a company’s assets can decline in value before debts may exceed assets.
Market value of Equity refers to the No. of outstanding shares multiplied by the market price. Since, BSNL shares are not listed in stock markets, the book value of Equity is adopted instead of market value.
‘E’ COMPONENT
The ratio of Sales to total assets is ‘E’ component of Z-Score. It measures the ability of the company’s assets to generate sale.

ANALYSIS
The various ratios for Z score value , Z score for BSNL and Bharti Airtel and comparative study of Z score for 5 years from 2009-10 to 2013-14 of telecom companies under study are presented in following tables:
TABLE 1: STATEMENT SHOWING VARIOUS FINANCIAL RATIOS FOR Z SCORE VALUE FOR BSNL
Ratio 2009-10 2010-11 2011-12 2012-13 2013-14
Working Capital/Total Assets (A) 0.05 -0.02 0.03 -0.03 0.01
Retained Earnings/ Total Assets (B) -0.01 -0.06 -0.09 -0.08 -0.08
EBIT/ Total Assets (C) -0.01 -0.06 -0.08 -0.08 -0.08
Market Value / Book Value of Debt (D) 0.25 0.41 0.41 0.39 0.39
Sales /Total Assets (E) 0.20 0.25 0.25 0.27 …show more content…
S. (2012, may). Evaluating Financial Health of Pharmaceutical industry in India through Z Score Model. International Journal of Social Sciences And Interdisciplinary Research, 1(5), 25-31.
7) M, M. G. ( 2014, March). Assessing the Financial Health of Select Automobile Companies in India: A Quantitative. Great Lakes Herald, 8(1), 32-45.
8) Pandey, I. M. (2005). Financial Management (ninth ed.). Noida: vikas publishishing house pvt. Ltd.
9) Reddy, C. V. (2012, dec). Analysis of liquidity, profitability, risk and financial distress: a case study of dr. reddy’s laboratories ltd. Indian Journal of Finance, 6(12), 5-17.
10) Sasikala, D. (2011, November)., Financial distress: bankruptcy measures in alembic pharma. international journal of research in commerce economics & management, 1(7), 112-116.
11) Sharma, R. &. (Dec - 2012). A comparative study of telecommunication service providers bsnl. international journal of business management and research, 2(4), 13-20.
12) Vijayalakshmi, D. B., & Sailaja, M. N. (2013, august). Financial health of selected companies in telecom sector: a comparative study. Arth Prabhand: A Journal of Economics and Management, 2(8), 53-61.
13) Yadav, H. K. (July 2014). A Comparative Study on Performance of Public Sector and. International Journal of Research (IJR),
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