Vol. 06, No. 2 (2024) 789-806, doi: 10.24874/PES06.02A.

006

Proceedings on Engineering
Sciences
www.pesjournal.net

A STUDY OF ALTMAN Z-SCORE BANKRUPTCY

MODEL FOR ASSESSING BANKRUPTCY RISK OF
NATIONAL STOCK EXCHANGE-LISTED
COMPANIES

Mohammad Asif
Sadhana Tiwari 1
Ashish Saxena
Sharad Chaturvedi Received 08.09.2023.
Received in revised form 12.02.2024.
Shashank Bhardwaj Accepted 07.03.2024.
UDC – 347.736

ABSTRACT
Keywords:
Altman Z-Score, Bankruptcy Model, This study aimed to predict the bankruptcy risk of companies listed on the
Bankruptcy Risk, National Stock National Stock Exchange (NSE) in India using the Altman Z-score model. By
Exchange, Listed Companies examining the impact of variable factors such as market value equity/book
value of total liabilities, retained earnings/total assets, working capital/total
assets, earnings before interest and taxes/total assets, and sales/total assets,
the research sought to assess their influence on the financial condition of
listed companies. The Altman Z-score model is a widely accepted tool for
predicting bankruptcy risk and has been utilized in various industries across
different countries. The model comprises five financial ratios that capture a
company's liquidity, profitability, leverage, solvency, and activity. By
analyzing these ratios, the model calculates a composite Z-score, which can
be used to classify companies into different risk categories. Using a sample of
NSE-listed companies, this study employed the Altman Z-score model to
predict bankruptcy risk and examined the impact of the five variable factors
on the firms' financial health. The findings provided insights into the
relationship between these financial ratios and the companies' bankruptcy
risk, offering valuable information for investors, policymakers, and other
stakeholders in the Indian financial market. The study demonstrated the
applicability of the Altman Z-score model in predicting bankruptcy risk for
NSE-listed companies in India and highlighted the importance of each
variable factor in assessing a firm's financial condition. These findings can
help stakeholders make informed decisions regarding investment, risk
management, and policy formulation in the Indian financial market.
© 2024 Published by Faculty of Engineering

1
Corresponding author: Sadhana Tiwari
Email: [email protected] 789
 Asif et al., A study of Altman Z-score bankruptcy model for assessing bankruptcy risk of national stock exchange-
listed companies
1. INTRODUCTION heavily influenced by the economy and the company's
operating industry (Georgiev & Petrova, 2015).
Financial stability is a major worry for our country's Furthermore, as an example, this model was developed
central bank and practitioners these days. The Indian using only publicly listed US firms. According to the
economy and its market-listed companies’ stability are findings of applied research, models lose predictive
critical in this respect. A large number of companies validity in many countries when economic conditions
have been founded, particularly in our nation. What is change (Karas & Srbová, 2019). With this in mind, the
"bankruptcy"? It is a judicial action in which a person or goal of this research is to analyse and develop the
company is unable to repay existing obligations Altman Z-score model using 20 NSE listed companies
(Beaver, 1966). For rating agencies, managers, as a case study.
investors, lenders, and even the company's owners, as
well as the country's economy as a whole, the capacity Since 1991, India has been attracting numerous
to predict a company's financial difficulty is crucial international enterprises as a rising economy (after the
(Alaka et al., 2018). There are supplementary models adoption of LPG), for which the Indian economy and
for envisaging bankruptcy risk, but the Altman Z-score business sector have seen remarkable development. The
(1995) updated model was employed in this research. In current mega-process of globalization, which includes
this study, 20 National Stock Exchange-listed unprecedented levels of liberalization, privatization, and
companies were used as a sample. All of them are listed marketization has opened up markets in ways that have
on the National Stock Exchange (NSE). This study never been seen before. Businesses engage in a variety
centers on the evaluation of z-score efficacy and of actions to stay afloat and produce profits for all
predicting impending financial difficulties in the sector, stakeholders. Finance, as the organization's lifeblood
while also determining the bankruptcy risk through and backbone, is evaluated for its soundness, since only
hypothesis testing and validating the suitability of the a financially healthy corporation can survive in today's
Altman Z-score model. hyper-competitive marketplaces. When a company's
entire obligations surpass its total assets, it declares
The financial condition's evaluation and analysis, as bankruptcy or defaults. As a result, the company's true
well as present actions, will have a substantial influence net value is negative. Organizations are in a mess due to
on the company's future development. Regardless of a a variety of factors, including worldwide
company's size, kind of operational activities, or other competitiveness, management inefficiency, a lack of
characteristics, it is vital to precisely comprehend the innovation, and industry restrictions, to mention a few.
indicators for its future position. (Svabova et al., 2020). The most common cause of a company's difficulty and
Seeking early-stage indicators for troubled potential demise is management ineptitude (Chang et
organizations is crucial; the sooner distress is detected, al., 2013). As a result, investors must use caution when
the more effectively remedial measures can be projecting the firm's insolvency. The Altman Z model is
implemented to alleviate the situation. Consequently, one of the indicators used to forecast corporate default.
various approaches to predict business difficulties have Even though the corporate sector is doing well, every
emerged and continue to be investigated. The impact of individual investor wants to know the company's
a troubled company on lenders, investors, and even the specific financial status so that they may make informed
industry and economy can be significant, depending on decisions and avoid being exposed to credit risk. This is
its size. As a result, this issue has become a primary especially important for banking businesses and
concern for analysts, who persist in their efforts to financial institutions to be extra careful when finding a
create a dependable instrument for assessing the risks company since when a company goes bankrupt, it
and perils associated with a company's collapse results in a large loss for them as well as the whole
(Svabova et al., 2020). economy. Financial trouble, or corporate bankruptcy,
refers to a company's inability to pay its debts. Banks,
Although early recommended models first appeared in companies, suppliers, and shareholders all lose a lot of
the literature in the 1960s, the beginnings of financial money when a firm declares bankruptcy. As a result,
situation theory may be traced back to the 1920s–30s. many investors are eager to forecast the current
Beaver is the first startup to employ ratio analysis to financial situation as well as the likelihood of
predict a company's financial problems (1966). Beaver bankruptcy within the next few months. There are
utilized a method known as univariate analysis to various techniques for predicting financial hardship in
evaluate financial ratios (Beaver, 1966). Altman (1968) the literature, the Altman Z-score remains one of the
developed a novel model based on five financial ratios best models with a high degree of accuracy.
and the multivariate discriminant analysis (MDA) Furthermore, research has demonstrated that the Altman
mathematical approach (Altman, 1968). This new model Z-score may be utilized to identify bankruptcy warning
was given the name Altman Z-score, and it has since signs and take remedial action (Bhatt, 2012). Using
become the most widely used technique in accounting various ratios and Z-scores, the current article examines
and financial research. The model has a problem in that the financial health and likelihood of bankruptcy of a
the multiple discriminant analysis coefficients were group of enterprises. The following are the parameters

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 Proceedings on Engineering Sciences, Vol. 06, No. 2 (2024) 789-806, doi: 10.24874/PES06.02A.006

that have been used in the Altman Z-score to assess the have reported similar success rates, which highlights the
bankruptcy benchmark. model's enduring predictive power. The authors note
that the Altman Z-Score model has been successfully
2. LITERATURE REVIEW applied to different industries and sectors, ranging from
manufacturing to service industries. This adaptability is
Fitzpatrick pioneered the use of financial measures to an important aspect of the model's continued relevance
anticipate the financial crisis in 1932. (Colak, 2019). in the ever-changing financial landscape. Over the
According to Fitzpatrick's research, accounting ratios years, the Altman Z-Score model has undergone various
might be employed as financial crisis indicators. Beaver adaptations and modifications to cater to the evolving
(1966) employed univariate analysis for prediction, financial environment and specific industry
utilising certain chosen ratios in the years after that. He characteristics. These modifications have helped
analysed five ratios to conclude that "net cash flow to improve the model's accuracy and applicability across
total liabilities" is the most important variable in different contexts. The authors highlight that the Altman
explaining company difficulty (Affes & Hentati-Kaffel, Z-Score model is relatively easy to use and interpret,
2019). making it accessible to a wide range of users, including
investors, creditors, and analysts. This simplicity
In the paper titled "Validity of Altman's Z-Score model contributes to its enduring popularity in assessing firms'
in predicting Bankruptcy in recent years" by Amin financial health and bankruptcy risk. In conclusion, the
Salimi (2015), the author explores the effectiveness of paper by Sherbo and Smith (2013) demonstrates that the
the Altman Z-Score. The paper highlights that the Altman Z-Score model has stood the test of time and
model's accuracy in predicting bankruptcy in the year remains a valuable tool for predicting bankruptcy 45
before the event was 92.5%. This implies that the model years after its development. The model's continued
could correctly identify 92.5% of the bankrupt firms in relevance can be attributed to its high accuracy,
the sample one year before they went bankrupt. The adaptability, ease of use, and the various modifications
research also explores the model's accuracy in that have been introduced over the years to enhance its
predicting bankruptcy two years before the event. The applicability across different industries and contexts.
author found that the Altman Z-Score model's accuracy
rate dropped to 77.5% when predicting bankruptcy two Altman (1968) used multiple discriminant analysis
years before it occurred. The study indicates that the (MDA) using five ratios to estimate the likelihood of a
Altman Z-Score model is a reliable tool for evaluating a company's collapse, and this approach became one of
firm's financial health, helping investors and creditors the first and most widely used models for predicting
make informed decisions about the potential bankruptcy financial trouble. There were 66 firms considered for
risk of the companies in which they are involved. In this research, all of which were manufacturing
conclusion, the paper demonstrates that the Altman Z- businesses. These businesses were divided into two
Score model remains a valid and useful tool for categories: bankrupt and non-bankrupt, with all
predicting bankruptcy in recent years, even though it bankrupt businesses filing bankruptcy petitions between
was developed more than four decades ago. It highlights 1946 and 1965. Initially, 22 variables were selected, but
the model's effectiveness in identifying the risk of after additional investigation, a discriminant analysis
bankruptcy in firms listed on the Tehran Stock with five variables was produced (see Equation (1)). All
Exchange, emphasizing its continued relevance in the of this is shown in the model below.
contemporary financial landscape.
𝑍 = 1.2𝑋1 + 1.4𝑋2 + 3.3𝑋3 + 0.6𝑋4 + 1.0𝑋5
In the paper titled "The Altman Z-Score Bankruptcy X1 = Working Capital / Total Assets
model at age 45: standing the test of time?" by Arthur J.
X2 = Retained Earning / Total Assets
Sherbo and Andrew J. Smith (2013), the authors assess
the applicability and effectiveness of the Altman Z- X3 = Earning Before Interest and Taxes / Total Assets
Score model in predicting bankruptcy after 45 years
X4 = Market Value of the Equity / Book Value of Total
since its inception. The paper is an evaluation of the
Assets
model's relevance and reliability in the contemporary
financial landscape. The authors emphasize that the X5 = Sales / Total Assets
Altman Z-Score model has withstood the test of time
and remains a reliable tool for predicting bankruptcy. Z = Overall Index Source.
The model has been widely utilized and tested across Altman (1968)
various industries and countries, demonstrating its
versatility and robustness. The paper acknowledges that 𝑍 ` = 0.717𝑋1 + 0.847𝑋2 + 3.107𝑋3 + 0.420𝑋4 +
the model has consistently shown high levels of 0.998𝑋5
accuracy in predicting bankruptcy. The original study The composite index suggests that a company is not
by Edward Altman in 1968 reported an accuracy rate of bankrupt if the Z value exceeds 2.99; it is categorized as
94% for predicting bankruptcy within one year of the a "grey area" when the index value lies between 1.81
event and 72% within two years. Subsequent studies and 2.99, and "bankrupt" if the index value is below

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 Asif et al., A study of Altman Z-score bankruptcy model for assessing bankruptcy risk of national stock exchange-
listed companies
1.81. If the index value dips below 1, the company is performed better than the other models (Barboza et al.,
deemed insolvent. 2017). Other studies have achieved a 99.7 percent
accuracy rate by combining artificial neural network
In 1977, Altman, Haldeman, and Narayanan enhanced models with the Magnetic Optimization Algorithm and
the model by proposing the zeta model, which included particle swarm optimization techniques. (Ansari et al.,
seven variables and boasted a 96% accuracy rate (Affes 2020). Each strategy has its own set of advantages and
& Hentati-Kaffel, 2019). In 1983, Altman renamed the disadvantages. Depending on the data, certain strategies
Altman Z score model the Z' model after revising it for outperform others in terms of accuracy, while others are
privately held companies. In this version, variable X4 worse (Huang & Yen, 2019).
was replaced with the book value of equity, and the
model was dubbed the Z-score model (The 240th From the standpoint of machine learning, several pieces
National Accounting Review, Volume 3, Issue 2, pages of research have been undertaken to forecast
237–255). It is worth noting that the coefficients for the bankruptcy. Support vector machines, random forests,
variables in this model vary slightly from those in the decision trees, gradient boosting, bagging, XG
original Z-Score model. Boosting, and hybrid models, which combine several
machine learning models, are some of the most popular
X1 = Working Capital / Total Assets
machine learning models. The Random Forest model
X2 = Retained Earning / Total Assets (2001) was created by Breiman. Both regression and
classification may be accomplished with the use of this
X3 = Earnings Before Interest and Taxes / Total Assets ensemble learning approach. In a decision tree
X4 = Market Value of the Equity / Book Value of Total approach, nodes are selected at random from each
Assets branch in order to determine the split. Using a random
vector, each tree is sampled from the same distribution
X5 = Sales / Total Assets as the rest of the forest. All the trees are built separately,
Z = Overall Index Source. and each one is fed with a classified sample. Following
the majority rule, each tree provides a classification, and
Altman (1968) then the findings of all the classifiers are combined to
As determined by the overall index, companies are form the classification results (Breiman, 2001).
classified as non-bankrupt. We call them "grey" if their
Z′ value is greater than 2.90, or if their index value falls The application of the Altman Z-Score has been adapted
between 1.23 and 2.90. They are defined as having a across various nations, resulting in differing outcomes
challenging financial condition if their index value is in country-specific research. Some studies have either
less than 1.23, and they are considered in high danger of updated the coefficients or verified the model's
bankruptcy. Results show that this model's classification applicability in a specific country or region.
accuracy for bankrupt companies was 90.9%, while its Diakomihalis (2012) found the Altman Z-Score model
classification accuracy for non-bankrupt companies was to be helpful in identifying hotels on the verge of filing
97.0% (Altman, 1983). for Chapter 11 bankruptcy. The model has been
extensively used in countries such as the United States
Aside from the Altman Z Score, there are a variety of (Barreda et al., 2017), Greece (Grammatikos and
additional theoretical, statistical, and artificial Gloubos, 1984), China (Wang and Campbell, 2010),
intelligence-related methodologies that may be used to India (Singh & Singla, 2019), Pakistan (Abbas and
anticipate financial difficulty. One of them is the case- Ahmad, 2012), and Indonesia (Abbas & Ahmad, 2012;
based reasoning model developed by Kolodner in 1993, Prabowo, 2019), among others. The model's application
while another is the entropy theory (Theil, 1969; Lev, in various countries has produced mixed results, with
1973). some studies supporting its validity while others
suggesting modifications or the inclusion of advanced
Gordini (2014) used genetic algorithms to model 3100 techniques.
small and medium-sized enterprises in Italy, and the Jawabreh, O. A., Al Rawashdeh, F., & Senjelawi, O.
results showed that 84.4 percent overall predictive (2017), The authors applied the Altman Z-Score model
performance was achieved (Gordini, 2014). The two- to predict the financial failure of hospitality companies
step classification technique based on a genetic in Jordan. The key observations from this study include
algorithm was used in another research conducted in - Altman Z-Score model proved to be a useful tool in
2017, which comprised 912 Russian business values, predicting the financial health of Jordanian hospitality
and the accuracy of the model was 93.4 percent, companies. The study found that some companies were
according to the results (Zelenkov et al., 2017). In in the "grey zone," indicating that they were neither
addition, in research done in North America in 2017, financially healthy nor in immediate danger of
eight distinct models were evaluated and contrasted. bankruptcy. The results emphasized the importance of
Machine learning and statistical models were compared. monitoring financial performance and using the Altman
The research found that the bagging, boosting, and Z-Score model as a proactive tool in managing potential
random forest models were the most accurate, and they financial distress in the hospitality sector.

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Kiaupaite-Grushniene, V. (2016, December), This study elements that contributed to the bankruptcy are divided
applied the Altman Z-Score model to forecast into three categories: common factors, internal factors
bankruptcy among listed Lithuanian agricultural of the firm, and external aspects of the company.
companies. The model showed its relevance in
predicting financial distress in the Lithuanian In the Indian Scenario, L.C. Gupta (1979) sought to
agricultural sector. Some companies were found to be at analyse corporate illness by selecting 41 textile firms
risk of bankruptcy, while others were financially stable. and 39 non-textile companies as samples. He employed
The study emphasized the need for continuous a variety of financial statistics to assess the performance
monitoring and assessment of financial performance, of the sample organizations in his study. Johah Aiyabei
especially in the agricultural sector, which is subject to (2002) investigated the financial health of small
various external factors, such as weather conditions and business concerns in Kenya using the Z score model,
global market fluctuations. and he identified theoretical features of distressed
enterprises that should be considered.
Chadha, P. (2016). Author applied the Altman Z-Score
model to assess the financial performance of listed Beaver (1966) investigates whether financial measures
companies and he mentioned that The Altman Z-Score may be used to forecast the demise of a company. His
model was effective in distinguishing between study sample consisted of 79 failing businesses that
financially stable and financially distressed companies existed between 1954 and 1964, both included. For each
in Kuwait. The model's application helped identify failed business, a non-failed firm in the same sector and
companies at risk of bankruptcy, enabling stakeholders with a comparable asset size was paired with it. The
to take preventive measures. The study highlighted the ratios were divided into six categories, with one ratio
importance of using the Altman Z-Score model as a from each category being examined for its predictive
reliable tool to evaluate financial performance and value. In all, he picked 30 ratios, which he divided into
predict bankruptcy risk in the context of the Kuwait six groups (univariate analysis). According to empirical
Stock Exchange. data, the cash flow to total debt ratio is the greatest
univariate discriminator for distinguishing between
Ratio analysis is a method used to examine a company's failed and non-failed enterprises in terms of cash flow.
financial statements, expressing the relationship The accuracy of the total debt cash flow classification
between two variables as a mathematical ratio. ranged from 87 percent (one year before collapse) to 78
Bambang Arwana (2001:329) defines financial ratio percent (one year after failure) (five years before
analysis as the process of identifying key operational failure). Beaver discovered, in subsequent research, that
and financial aspects of a company from its accounting fluctuations in the market price of equities were also
data and financial statements. The objective is to strong markers of financial difficulty in the economy.
evaluate management performance efficiency as Beaver's approach has been criticised for relying on a
reflected in the company's financial records and single variable and computing a small number of ratios.
statements and provide suggestions for improvement. Others have employed multivariate approaches to
The ratios used in Altman's approach can be grouped examine the capacity of financial measures to predict
into three categories: liquidity ratios, profitability ratios, company collapse, rather than the univariate procedures
solvency ratios, and activity ratios, with liquidity ratios used by Beaver to conduct his research.
being the most common.
Charles Moyer (1977) re-examined certain critical
Brigham and Gapenski (1997) categorized financial aspects of Altman's model based on the following
distress into several types, including economic failure, criteria: Over the first two years before the bankruptcy,
business failure, technical insolvency, bankruptcy the Altman model's performance was remarkable, but it
insolvency, bankruptcies, and legal insolvency. suffered a large decrease over longer lead periods. As a
Financial distress occurs prior to the filing of a result of this, the variables employed by Altman in his
bankruptcy petition, and bankruptcy is often model are dependent on how long he used to build it
characterized as a state or condition where businesses and how large his original sample of companies was.
fail or can no longer meet their financial obligations due Researchers used linear MDA, direct, and Wilks's
to insufficient funds. method to analyse data from 27 bankrupt and 27 non-
bankrupt companies in the Charles sample between
Sudana (2011) writes in his book that economic reasons, 1967 and 1975. Three variables are significant in the
managerial failures, and natural calamities are all prediction of bankruptcy within three years: X1, X2,
variables that contribute to the development of financial and X3 (working capital/total assets, retained earnings,
crises. As a result, financial challenges will be and EBIT/total assets) and X4 (market value of
experienced by the firm as a result of a failure in its equity/book value of total debt) and X5 (sales/total
business activities. However, the majority of the factors assets) are not significant at all. The factors X4 and X5
that contribute to the onset of financial hardship, (market value of equity and book value of total debt)
whether directly or indirectly, are the fault of have a significant impact on the results.
management, which is why it occurs again. The

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 Asif et al., A study of Altman Z-score bankruptcy model for assessing bankruptcy risk of national stock exchange-
listed companies
There were three models employed in the study: Early warning is very much desired, if not essential,
Altman's original Z score model, a re-estimated Z score since financial difficulties may lead to bankruptcy. The
model, and the third model, which included an extra inability of a person or company to fulfil its existing
variable. To find out whether the Altman Z score should debts is characterised by a bankruptcy (Aliakbari,
be adjusted for the prediction of bankruptcy in 2009). An early warning signal of potential failure will
manufacturing and non-manufacturing enterprises allow both management and investors to take
across different timeframes, A new variable named preventative actions, "Aharony, Jones, and Swary
"asset volatility" was incorporated into Altman's re- (1980) claimed in their study. As a result, it's no wonder
estimated model after the coefficients of his original that the emphasis of bankruptcy research has switched
model were re-estimated and assessed for accuracy by from strategies to prevent it to techniques to forecast it
the estimation group. Findings from the study show that entirely. Winakor and Smith (1935) found that the
the Altman Z score model is suitable for forecasting evaluation of financial ratios for struggling businesses
bankruptcy in both manufacturing and non- varies considerably from that of financially stable
manufacturing companies, with the greatest predictive companies. In his paper, Beaver (1966) examined
potential of the market value of equity and total various financial ratios for a group of bankrupt firms
obligations. Adding a new variable doesn't seem to have and a group of non-bankrupt firms. Beaver is
a significant impact on the results. recognized for pioneering the development of a
bankruptcy prediction model, as he discovered that
Scott (1981) conducted a survey of statistical and financial ratios from five years prior to bankruptcy
theoretical prediction models; however, it was fairly could forecast the risk of bankruptcy. Beaver (1966)
restricted in its scope and may be considered outdated in used a framework similar to that of Gambling Ruins 4 to
today's context. Zavgren (1983) focused only on construct his model in his article. As a result, the
statistical models, with no reference to theoretical corporation is considered a "liquid asset reserve" that is
models. Altman (1984) carried out the first study on "supplied by inflows and drained by withdrawals." The
prediction models in businesses outside the United risk that the reservoir will be depleted, at which time the
States, covering 10 countries. This study was significant business will be unable to fulfil its commitments as they
but only examined one type of statistical model. Jones et mature, may be used to determine the firm's solvency.
al. (1987) attempted to offer a comprehensive review of He was implying that a corporation would continue as
all prediction models, focusing on research in the field long as it had financial reserves.
of corporate bankruptcy prediction. However, it did not
explore theoretical methods or models. Altman (1968) argued in his study that the
aforementioned data demonstrate the predictive power
Key and Watson (1991) researched the limits of of financial ratio analysis convincingly. As a result, he
prediction models in terms of decision usefulness. was inspired to work on developing a model that uses
However, the research was limited to just statistical ratio analysis to improve bankruptcy forecasting.
models and only a handful of them at that. With a focus Altman (1968) employed multiple discriminant analyses
on current models (1996), Dimitras et al. conducted a to build his model, although there are different
successful evaluation of several methodologies used to approaches. Ohlson (1980) used a technique called
develop bankruptcy prediction models. However, while logistic regression (Logit). Over six years, he utilized a
being one of the most extensive studies at the time, this sample of 2163 firms (5, 1970–1976). He discovered
study overlooked theoretic models. Morris's that one year before bankruptcy, the company's size,
examination of prediction models is perhaps the most financial structure, performance, and present liquidity
thorough to date (1998). From an empirical standpoint, had predictive power. Furthermore, although the score
it addresses prediction methods and applications. of a multiple discriminant analysis must be translated
Despite being quite thorough, it nevertheless overlooked into the probability of default using historical data, the
a few prediction models, and several models that Logit model score provides the default probability, and
emerged later in the theoretical domain were not Lacerda and Moro (2008) found it to be a more
addressed or considered by the research. Zhang is appealing statistical approach. This reasoning prompted
attempting to comprehend the function of neural Seaman, Young, and Baldwin (1990) to investigate the
networks in the prediction of bankruptcy. They also go predictive powers of linear, quadratic, and logistic
into the empirical uses of networks for bankruptcy models; their findings revealed that the quadratic
prediction, but they leave out all of the other kinds of discriminant technique had the highest predictive power
models that companies use (Zhang et al., 1999). of 78 percent. Nonetheless, their findings on the
Crouchy's work (Crouchy et al., (2000)) goes into great quadratic model conflict with those of Frydman,
length on credit risk models. From a theoretical Altman, and KAO (1985).
standpoint, it does an excellent job of covering credit
risk models and several key bankruptcy prediction Clark, Foster, Hogan, and Webster's K & P model is
models. However, it does not cover other kinds of another bankruptcy prediction model (1997). Due to the
models. lack of accuracy in the financial data utilized in the
univariate method, this model tries to forecast

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bankruptcy using an analytical hierarchy process. The calibrating it for publicly listed Japanese industrial
concept divides financial risk into four levels of enterprises. Even if the concerns outlined above are
hierarchy and three financial categories. In addition, correct, the danger model still has faults that need to be
four financial risk variables influence financial risk: addressed. In the first place, there is a problem with
asset usage, financial flexibility, earning potential, and multicollinearity. Correlations between independent
liquidity situation (Clark et al., 1997). Shareholders, variables must be avoided in hazard models, as Balcaen
creditors, workers, rating agencies, and others place a and Ooghe (2004) have warned us about. Table 8 in
high value on failure prediction models, and much Appendix B shows that the hazard model cannot be
additional research has been conducted on this goal used in this study because of the strong correlation
throughout time (Aliakbari, 2009). Hensher and Jones between the variables (Lane, Looney, & Wansley,
(2007), for example, found that various econometric 1986). Hazard models' second problem is their erratic
models, such as the nested logit model, mixed logit calculation of survival time. According to the hazard
model, error component logit model, and latent class model, the bankruptcy procedure does not begin until
multinomial logit, were superior to frequently used the end of the annual account closure period (Luoma &
standard logit models in terms of explanatory and Laitinen, 1991).
statistical power (Jones & Hensher, 2007).
Collins (1980) compares numerous models for assessing
Scholars continue to dispute the Z-score model even bankruptcy. Even though many models provide
though most of the above-mentioned papers excellent results, the research concludes that the Z-score
acknowledge Altman (1968) as the pioneer of the is the best. Zavgren and Friedman (1988) investigated
bankruptcy prediction model. Shumway (2001) and the usefulness of bankruptcy prediction models in
Campbell, Hilscher, and Szilagyi (2001) were the most security analysis. They discovered that bankruptcy
prominent critics of Altman's modelling and variable forecasting models may be used in security analysis to
selection (2011). The critics have mostly focused on the analyse published financial statements.
following aspects while criticizing Altman: In his
research, Shumway (2001) outlined three main The prediction potential of several financial measures is
objections to Altman's approach. To begin with, the investigated by Pompe and Bilderbeek (2004). They
analysis was undertaken over some time. For example, discovered that every ratio had some predictive capacity
Shumway (2001) argues that single-period models are for financial hardship after studying small and medium-
inconclusive since the likelihood of a company's sized businesses in various stages of bankruptcy.
bankruptcy changes over time and its health is
determined by its most current financial data and age. Grice and Ingram (2001) investigate the generalizability
Critique No. 2 focuses on the bankrupt firm's financial of the Z-score application. The research reveals poor
condition. An assertion by Shumway (2001) that firms' outcomes when applying the Z-score to recent eras and
financial situations worsen as they approach insolvency manufacturing enterprises, but favourable findings when
is ignored by Altman (1968). According to Shumway it comes to forecasting distress other than bankruptcy,
(2001), firms with high working capital or total assets in which is what it was initially designed for.
one year that go bankrupt the next year are not taken
into consideration by Altman (1968), leading to the test Bal and Raja (2013) investigate earnings management
results being inflated. The study's financial ratios are the and solvency prediction approaches. Their research
last topic of contention. According to Shumway (2001), employs the Z-score to anticipate IOCL's financial
many market-driven elements, such as market size, hardship and indicates that the company's financial
historical stock returns, and idiosyncratic stock standard status is not as excellent as the initial Z-score suggests.
deviation, are missing from earlier bankruptcy models. Based upon the above literature, researcher suggested
He also claims that the majority of the financial following hypothesis:
measures employed in earlier models are poor
predictors. Campbell et al. (2011) constructed their H1- There is no significant impact of Variable
model based on his critique as well as his model, which Factors, market value equity/book value of total
outperformed Shumway's (2001). They discovered that liabilities, retained earnings/total assets, working
distressed stocks have large market betas and extremely capital/total assets, earnings before interest and
variable returns and that they underperform safe stocks taxes/total assets, and sales/total assets, on the
more when market volatility and risk aversion are high. financial condition of listed companies.

This does not mean that the Z-score model proposed by Hl: There is the significant impact of Variable Factors,
Altman is flawed; rather, it demonstrates that as time market value equity/book value of total liabilities,
went on, more sophisticated methodologies and, retained earnings/total assets, working capital/total
therefore, more acceptable financial considerations were assets, earnings before interest and taxes/total assets,
discovered. While prior publications focused on and sales/total assets, on the financial condition of listed
constructing a more predictive model, this research companies.
validates the original Altman (1968) Z-score model by

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 Asif et al., A study of Altman Z-score bankruptcy model for assessing bankruptcy risk of national stock exchange-
listed companies
Leave one clear line before and after a main or annual reports of specific National Stock Exchange-
secondary heading and after each paragraph. listed 10 companies from FY 2010 to 2020. As stated,
the Zaltman Score has been used in this study to
Avoid leaving a heading at the bottom of a column, with measure the potential bankruptcy of a company in 07
the subsequent text starting at the top of the next listed companies on the Bombay Stock Exchange.
page/column.
Once the initial categories and firms are selected, the
3. PROBLEM STATEMENT balance sheet and income statement data are acquired. A
list of 20 possible variables (ratios) was established for
Investors in general, and retail investors in particular, examination owing to the large number of
are the most sensitive and fragile participants in the characteristics demonstrated to be relevant indicators of
world of finance, where there is a plurality of money. business challenges in prior studies. The five standard
Corporate bankruptcy is the worst thing that can happen ratio categories for the variables are liquidity,
to investors since it wipes away a company's equity and profitability, leverage, solvency, and activity. There are
reduces the stock's investment value to zero. Investors a few "new" ratios included in this analysis because of
often use information sources such as issuer (s) offer their popularity among academics and their relevance to
papers, market intermediary research studies, media the study.
reports, and financial statements to judge the legitimacy
of investments and issuers. However, a large number of The original list of 22 variables was narrowed down to
Indian investors are unaware of how to properly five indicators that performed the best overall job of
understand and analyse information included in public forecasting the bankruptcy of a firm. All of the most
financial statements. Apart from that, investors lack the critical factors that were assessed independently are not
necessary knowledge, time, and other resources to included in this profile. A multivariate analysis would
analyse the creditworthiness of issuers. In this context, not always be better than a typical univariate analysis.
the Altman Z Score model may be used to predict Since this is a recursive process, there is no guarantee
whether a firm will file for bankruptcy. The purpose of that the final discriminant function will be the best one
this article is to investigate the likelihood of failure of a possible. When compared to other methods, the function
few specific retail businesses. Table 1 shows the Altman surpasses them all since it doesn't require as many
bankruptcy criterion to assess the financial condition of computers run.
a bank:
The following are the steps used to arrive at a final
Table 1. Altman Bankruptcy Criterion profile: Analysis of numerous alternative functions, as
Discrimination Financial Status well as the relative contributions of each independent
Safe Zone Z> Good financial health variable, as well as the intercorrelations among the
2.6 relevant variables, as well as analysis of various
Grey Zone 2.6 < The probability that the company profiles, and the analyst's judgement. The Following
Z is bankrupt or not variable was selected for the study's purposes.
<1.1
Distress Zone Z< Probability occurrence
1.1 bankruptcy and high risk

3.1 Research Objectives

To predict the bankruptcy risk of the National Stock

Exchange-listed companies in India by using the
Altman Z score model. To assess the impact of variable
factors, market value equity/book value of total
liabilities, retained earnings/total assets, working Notably absent from the model is a constant term (Y-
capital/total assets, earnings before interest and intercept). As a result, the acceptable cutoff score for
taxes/total assets, and sales/total assets on the financial the two groups is not zero, and this is attributable to the
condition of listed companies. programmed utilized. A constant term in other software
programmers, such as SAS and SPSS, sets the threshold
4. BODY OF THE PAPER score to zero if the sample sizes of the two groups are
equal.
This study is structured as a descriptive and quantitative
study that focuses on detecting bankruptcy risk using The researcher has chosen a total of seven national
Altman's z-score model, followed by an empirical stock exchange-listed companies for their research, and
investigation into the National Stock Exchange-listed the purposive sampling method has been used. Data
companies in India. This study is heavily reliant on collection for the independent variable has been taken
secondary data sources. The data was collected from from the national stock exchange from 2010 to 2020.

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5. BODY OF THE PAPER The Table 2 and Table 3 indicated the following results
in -0.27 for 2016-17, -0.23 for 2015-16, and -0.25 for
Here in this analysis, the researcher has selected 10 2014-15, respectively. We determined that Bhushan
companies from the Bombay Stock Exchange, Steels has been in danger since 2010-2011 when we
specifically, Dewan Housing Finance, Reliance applied the Altman Z score. According to the crisis
Communication, Jet Airways, Cox and Kings, Gitanjali zone, the corporation is expected to go bankrupt shortly.
Gems Limited, Jaypee Infratech Limited, Lanco Using liquidity measures, we were able to acquire more
Infratech Limited, Jyoti Structures Limited, ABG confirmations of the financials' inadequacy. According
Shipyard Limited And Bhushan Steel Limited to predict to the model's forecast, the firm was declared bankrupt
financial distress and bankruptcy possibilities based on in 2017, indicating that the model was correct and
Altman Z score. effective in the current circumstance.

Table 2. Bhushan steel limited particulars

Particulars
Year
Current - Assets Current Liabilities Retained - earning Sales EBIT Market Value of Equity Total Assets
2016-17 579,529 2,753,910 (766,487) 1,502,730 130,168 158,560 6,046,340
2015-16 200,723 2,127,349 -408,207 1,312,407 40,714 91,738 6,002,472
2014-15 1,166,582 1,208,986 -124,270 1,064,577 123,908 99,893 5,290,752

Table 3. Bhushan steel limited particulars Ratios

Ratios
Year
X1 X2 X3 X4 X5
2016-17 (0.36) (0.13) 0.02 0.03 0.25
2015-16 (0.32) (0.07) 0.01 0.02 0.22
2014-15 (0.01) (0.02) 0.02 0.02 0.20

Table 4 and Table 5 indicates that Altman Z Score let us Altman Z score led to bankruptcy proceedings in 2017,
uncover that ABG Shipyard was in difficulties in 2009- proving that the model was right and successful in this
2010, but was able to sustain itself for six years situation.
thereafter. An increasing decline in the company's

Table 4. ABG Shipyard Limited Particulars (in crore)

Particulars
Market
Year Current - Current Retained -
Sales EBIT Value of Total Assets
Assets Liabilities earning
Equity
2015-16 801,963 888,817 (431,146) 3,427 (286,696) 16,317 1,109,225
2014-15 909,765 717,052 (60,674,92) 39,213 -38,111 38,872 1,235,460
2013-14 867,760 748,238 29,575 162,500 38,489 509,218 1,218,777

Table 5. ABG Shipyard Limited Particulars Ratios

Ratios
Year
X1 X2 X3 X4 X5
2015-16 -0.08 (0.39) (0.26) 0.01 0.00
2014-15 0.16 (0.05) (0.03) 0.03 0.03
2013-14 0.10 0.02 0.03 0.42 0.13

Table 6 and Table 7 shows using the Altman Z score dropping in 2013 and 2014. Because of its precision and
model, For Jyoti Structures, the Altman Z score was efficiency, the company was compelled to file for
used to determine its financial health, and we found that bankruptcy in 2017.
the company's EBIT and Retained earnings were both

Table 6. Jyoti Structures Limited Particulars (in crore)

Particulars
Year Current - Current - Retained - Market Value
Sales EBIT Total Assets
Assets Liabilities earning of Equity
2015-16 536,801 505,754 (38,722) 249,243 5,753 10,734 597,900
2014-15 455,878 299,908 11,613 278,173 10,023 17,634 513,022
2013-14 387,795 310,641 39,019 332,576 27,262 32,622 4,205,932

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 Asif et al., A study of Altman Z-score bankruptcy model for assessing bankruptcy risk of national stock exchange-
listed companies
Table 7. Jyoti Structures Limited Particulars Ratio
Ratios
Year
X1 X2 X3 X4 X5
2015-16 0.05 (0.06) 0.01 0.02 0.42
2014-15 0.30 0.02 0.02 0.03 0.54
2013-14 0.02 0.01 0.01 0.01 0.08

Table 8 and Table 9 shows that after putting these bankruptcy procedures were started in 2018, proving the
numbers through the Altman Z score model, we came model's accuracy and efficacy, even though the
up with these numbers: -0.44 in 2016-17 and -0.39 in company's current assets to total assets ratio has been
2015-16. After applying the Altman Z score to Lanco decreasing, showing that the company's liquidity has
Infratech, we determine that the company has been in been worsening.
the problematic zone since 2013. Lanco Infratech's

Table 8. Lanco Infratech Limited Particulars (in crore)

Particulars
Year Current - Retained - Market Value
Current Assets EBIT Total Assets
Liabilities earning of Equity
2016-17 66,903 806,672 (60,637) 39,568 37,116 1,904,650
2015-16 773,521 896,549 (16,137) (4,507) 88,400 2,049,052
2014-15 758,865 769,617 51,911 (33,136) 145,913 1,918,157

Table 9. Lanco Infratech Limited Particulars Ratios

Ratios
Year
X1 X2 X3 X4
2016-17 -0.08 (0.03) 0.02 0.02
2015-16 -0.06 (0.01) (0.00) 0.04
2014-15 -0.01 0-03 (0.02) 0.08

In Table 10 and Table 11, 2015-16, 1.40 in 2014-15, 2015-2016, which indicates that the firm is likely to go
and 1.36 in 2013-14, the Altman z score model yielded insolvent soon. As a result of the lack of 2016-2017
corresponding values of 1.67, 1.40, and 1.36, financial data, the Z could not be computed, and the
respectively. Altman Z score analysis shows that Jaypee model's efficacy and accuracy could not be evaluated.
Infratech has been in the grey zone from 2013-2014 to 2017 was a bad year for the company under scrutiny.

Table 10. Jaypee Infratech Limited Particulars (in crore)

Particulars
Year Current - Retained - Market Value
Current Assets EBIT Total Assets
Liabilities earning of Equity
2015-16 752,833 376,395 26,415 57,195 102,781 1,830,148
2014-15 985,286 732,976 45,244 132,241 177,645 2,057,431
2013-14 958,275 614,280 35,244 12,447 297,926 2,036,025

Table 11. Jaypee Infratech Limited Particulars Ratio

Ratios
Year
X1 X2 X3 X4
2015-16 0.21 0.01 0.03 0.06
2014-15 0.12 0.02 0.06 0.09
2013-14 0.17 0.02 0.01 0.15

Table 12 and Table 13, the resulting scores of 1.406 for Gems, we discovered that the firm has been in the
2016-17, 1.568 for 2015-16, and 1.407 for 2014-15 by troubled zone since 2014-2015, but the bankruptcy was
applying the Altman Z score model to the provided data. filed in 2017, demonstrating the model's accuracy and
Using the Altman Z score on the financials of Gitanjali usefulness.

Table 12. Gitanjali Gems Limited Particulars (in crore)

Particulars
Year Current - Retained - Market Value
Current Assets Sales EBIT Total Assets
Liabilities earning of Equity
2016-17 1,164,774 925,657 165,847 1,046,477 51,683 81,015 1,302,576
2015-16 790,955 596,529 122,481 860,363 43,784 57,775 951,215
2014-15 779,588 583,715 117,605 715,793 54,219 40,622 943,200

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Table 13. Gitanjali Gems Limited Particulars Ratio

Ratios
Year
X1 X2 X3 X4 X5
2016-17 0.18 0.13 0.04 0.06 0.80
2015-16 0.20 0.13 0.05 0.06 0.90
2014-15 0.21 0.12 0.06 0.04 0.76

Table 14 and Table 15 indicates the Altman Z score favorable and score in 2017-18 was observed 1.45,
values for 2019-20 and 2018-19 were 7.63 and 26.96, which indicate that company may bankruptcy in near
respectively, which indicates that the company was in future and later on, company himself declared the same
the sound situation and there was no situation of getting in the financial year 2018-19.
into bankruptcy, although the situation did not remain

Table 14. Jet Airways Particulars (in crore)

Particulars
Current Current - Retained - Market Value
Year Sales EBIT Total Assets
Assets Liabilities earning of Equity
2019-20 318969 2161764 (1569346) 33345 (253959) (1557986) 692661
2018-19 591862 2205432 (1280899) 2305741 (455412) (129539) 111329
2017-18 705345 1416090 (735560) 2328653 7524 (724200) 1247288

Table 15. Jet Airways Particulars Ratios

Ratios
Year
X1 X2 X3 X4 X5
2019-20 2.66 2.26 .36 2.25 0.048
2018-19 (14.49 11.50 4.09 11.40 20.71
2017-18 0.56 0.0.58 .006 0.58 1.86

As per Table 16 and Table 17 the corresponding value in the sound financial situation and was facing the threat
of Altman Z score was point .93, .92 and 1.26 in 2012- of getting bankrupt and finally, it happened 2 years
13, 2013-14 and 2014-15 for Reliance Communication back, when it declared itself bankrupt.
respectively, that indicates that the company was never

Table 16. Reliance Communication particulars (in crore)

Particulars
Current - Current - Retained - Market Value
Year Sales EBIT Total Assets
Assets Liabilities earning of Equity
2014-15 16965 13418 34627 10801 3020 35871 75352
2013-14 14699 19220 30735 11176 1038 31767 77264
2012-13 12261 23439 32818 20561 3314 33850 90182

Table 17. Reliance Communication ratio

Ratios
Year
X1 X2 X3 X4 X5
2014-15 0.047 0.46 .040 0.48 0.14
2013-14 (.058) 0.40 .013 0.41 0.14
2012-13 (.12) 0.36 .037 0.37 0.23

Table 18 and Table 19 shows that Altman Z score getting into bankruptcy, although the situation did not
values for 2014-15 and 2015-16 were 1.22 and 1.07, improvise in 2016-17 and was observed 1.8, which
respectively, which indicates that the company was not indicate that company may bankruptcy in near future.
in a sound situation and there was a higher possibility of

Table 18. Cox and Kings particulars (in crore)

Particulars
Current - Current - Retained - Market Value
Year Sales EBIT Total Assets
Assets Liabilities earning of Equity
2016-17 468037 302966 251121 717629 60948 259949 899700
2015-16 447260 322204 230380 235191 40791 238846 936245
2014-15 364905 228351 246224 256909 55801 254690 899309

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 Asif et al., A study of Altman Z-score bankruptcy model for assessing bankruptcy risk of national stock exchange-
listed companies
Table 19. Cox and Kings Ratios
Ratios
Year
X1 X2 X3 X4 X5
2016-17 0.18 0.28 0.068 0.29 0.80
2015-16 .13 0.25 0.044 0.26 0.25
2014-15 .15 0.27 0.062 0..28 0.29
Table 20 and Table -21 indicates that Dewan housing getting bankruptcy shortly if corrective measures are not
finance remained in Grey Zone for 2016-17, 2017-18 taken. The situation went serious for dewan housing
and 2018-19 in Table 21 shows the middle ground of finance and finally, it was also declared bankrupt.

Table 20. Dewan Housing Finance particulars (in crore)

Particulars
Market
Current - Retained -
Year Current - Assets Sales EBIT Value of Total Assets
Liabilities earning
Equity
2018-19 104594.95 45096.46 7744.92 12801.49 8227.87 8102.06 106475.25
2017-18 105050.81 5195.89 8918.87 10743.11 9422.97 9232.53 106311.65
2016-17 21679.51 16524.64 7682.65 8851.76 10025.43 7995.80 92297.98

Table 21. Dewan Housing Finance Ratios

Ratios
Year
X1 X2 X3 X4 X5
2018-19 0.56 0.07 0.078 0.076 0.12
2017-18 0.94 0.08 0.089 0.087 0.10
2016-17 0.056 0.11 0.11 0.087 0.096

6. DISCUSSIONS years. Altman's Z score exhibited outstanding accuracy

in the prediction test one year before the ratings on the
Z-score models strive to evaluate a corporation at financial health of enterprises. The overall prediction
various economic levels by its very nature. Altman's Z rates for all phases of financial conditions were in the
score is based on a comprehensive evaluation of the range of 87 percent to 100 percent using Altman's Z
company. Each of the five factors is used to assess the score. Altman's Z score is a more reliable model than
firm's liquidity, profitability, productivity, leverage, and any other prediction model, which has a prediction rate
operational efficiency. ranging from 42% to 96 percent. Only for businesses
with insufficient safety, does Enyi's RSR outperform
Based on various ratios available in the public domain, Altman's Z score in predicting financial situations.
Altman's Z score is shown to be more accurate than any Altman's Z score offers a better signal of distress than
other financial ratio, which may help predict the 83 percent, 89 percent, and 96 percent for default, high
financial bankruptcy of any of the listed companies. risk, and significant risk businesses during the two years
This suggests that Altman's Z score is better at detecting before being evaluated by CRISIL. The findings back
default and distress. The goal of this study was to see up prior research suggesting Altman's has a greater
how well the models for assessing financial hardship accuracy rate in anticipating financial trouble as the
worked. As a result, Altman's Z score is demonstrated to failure period approaches. The model's accuracy in
be a better model with a stronger connection with predicting healthy enterprises was also examined in this
CRISIL scores. The results suggest that using Z score to study. And the findings showed that the bankruptcy
replace credit ratings from various rating firms, which prediction model may be used to assess a company's
may be quite costly, would be advantageous to all financial health at any point in its solvency. According
stakeholders. The feasibility of any financial crisis to the results of the aforementioned investigation,
prediction model cannot be determined just based on Altman's Z score is more reliable for forecasting the
data and analysis from a single point in time. As a likelihood of failure of Indian manufacturing
result, the predictive capacity of the two models to enterprises.
forecast distress or safety before CRISIL categorization
was investigated in this study. For one and two years Financial ratios are representations of accounting data
before the rating year, the research used Altman's Z that are used to calculate the ratio. The categorization
score to evaluate the businesses that had received ability of each of the ratios was investigated in order to
CRISIL ratings. get insight into which ratios were the best metrics for
distinguishing healthy companies from default firms.
The study aimed to see whether the forecast accuracy The tests revealed that the ratios that could distinguish
increased as the rating year approached. According to between failed and non-failed organizations might
the data, Z models had a greater rate of prediction potentially be used to diagnose financial sickness in
accuracy for one year before the ratings than for two companies before they collapse. The research served as

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the foundation for the development of a new financial companies used cheap interest rates to increase their
assessment model to categories the firm's financial debt regularly. As a consequence, businesses' financial
situation. The research also used the same statistical test risk started to rise. Companies' profitability started to
for the ratios of businesses that received CRISIL's safe dwindle as a result of increased worldwide rivalry. As a
and healthy ratings. This aided the study in further result, the average Z-score decreased, indicating that if
refining the suggested model so that it could identify the the original cutoff values had been used, more
firm's safety level, which ranged from highest to enterprises would have been classified as likely
sufficient. The ratios of the organizations that were bankrupt using the Z model. We required bond-rating
granted ratings ranging from high-risk to default equivalence of the scores to modernize the model,
underwent the same method. which develops regularly and provides an updated
character to the interpretations of the scores.
The Altman Z approach is well-known for its use in We now believe that the chance of default, rather than
evaluating bankruptcy companies. However, the model the zone categorization—safe, grey, or distressed—is
may also be used to measure the performance of a stock the most essential feature of the Z model. It's a two-step
investment. According to this research, the Altman Z- procedure for us. The chance of default is calculated
Score may be used alternatively to identify the financial using the company's score, whether it is Z, Z prime, or Z
failure of a corporation. Again, the model cannot be the double prime. Then we look at the corresponding bond
sole instrument for comprehending the stock market. It rating at that moment in time. In 2015, for instance, the
might be a useful addition for long-term investors. typical B-rate corporation had a Z-score of about 1.6. In
Because it is based on ratios, the model may be simply 1968, it would have been in a disaster zone. However, B
comprehended and interpreted by a layperson. This is now a pretty typical bond grade for many businesses.
approach also presents a fresh perspective on ratios, It's perhaps the most popular garbage rating category on
which were previously deemed outmoded due to the the planet. If all firms in the world were given a grade,
frequent introduction of new tools and techniques. Any the average would probably be around B. So, based on a
theory isn't flawless, and it has its own set of flaws. This bond rating equivalent, we assign a likelihood of default
model aids us in comprehending a company's by looking at the historical frequency of default given a
performance over time, serving as a guideline for B rating at birth. What is the chance of default given a
avoiding financial crisis businesses or divesting existing bond rating comparable over one to ten years? So we're
investments in such organizations. One must be cautious no longer only looking at the credit worthiness cutoff
enough to understand the situation and make the scores for the three zones.
appropriate investment decisions.
The great majority of individuals are abusing the Z-
The Z-score model's own designed ZL-score model score because they apply it to all sectors and industries
forecasts bankrupt enterprises more accurately than non- at the same time. And what we've seen over time is that
bankrupt firms, despite conflicting explanations. non-manufacturers, particularly in specific categories
According to the ideas, an important argument in times like services or retail, have higher Z-scores on average
of financial difficulty is earnings management (Garca than manufacturers. So it is advisable to look at "Z" and
Lara, GarcaOsma, and Neophytou, 2009; Mselmi, its bond rating equivalent technique for determining the
Lahiani, and Hamza, 2017), which tries to conceal possibility of default if it is not a manufacturing
financial difficulty to fulfil stakeholders' expectations company.
and subsequently acquire finance. Managers may alter
reported financial statement statistics, resulting in a It is often stated that using a local model rather than the
decreased assessment of the likelihood of bankruptcy. original US model is preferable. Brazil, Australia,
These hypotheses led me to believe that the models France, Italy, and Canada are building local versions of
would be better at predicting non-bankrupt companies. the games in their nations. And references to models can
However, actual data from the Z-score models be found virtually anywhere on the planet. It's a very
demonstrates that bankrupt enterprises are predicted simple way for practitioners to adapt to a new setting.
with more accuracy than nonbankrupt firms. There were several factors to pick from in the literature
to predict insolvency. However, two variables had the
In light of Altman's forecasts, he assumed that the credit potential to be very strong but had not yet been
market would collapse and that there would be a employed. The withheld profits were one of them. The
financial catastrophe. But instead of company failures idea is that a company that has expanded its assets
causing the crisis, it was mortgage-backed securities primarily via reinvestment of revenues is healthier than
that triggered the 2008 financial crisis (MBS). In 2009, a company that has built its assets primarily through the
however, corporations defaulted at the second-highest use of "other people's money." Retained earnings are
rate ever recorded. also a proxy for the company's age and leverage. As a
result, one may assess combined leverage, profitability
Over time, firms' average Z-scores were decreasing. The throughout the company's lifetime minus dividends, and
bond market became more accessible to both investment the company's age or experience. The combination of
grade and non-investment grade corporations, and retained profits and total assets is quite potent in the Z

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 Asif et al., A study of Altman Z-score bankruptcy model for assessing bankruptcy risk of national stock exchange-
listed companies
model, yet it is seldom discussed in the literature. It is Investors and creditors, for example, need to know
incredibly vital and benefits practically every model that whether the company is in danger of bankruptcy to
has been developed throughout a time for various avoid large losses. Our results are significant to a range
sectors and nations. of stakeholders. By alerting businesses of imminent
financial troubles, it is possible to minimize losses.
An additional innovative element at the time, which is Managers may be urged to improve the financial status
now well-known, was comparing stock market value to of the organizations they are in charge of from the
debt's book value (rather than equity's book value to beginning of their careers. To help auditors analyse a
debt). As a measure of a company's capacity to obtain company's performance using financial indicators, the
money from capital markets to pay down debt or grow findings of the study conducted using the Altman Z-
its operations, market equity relative to book debt is a Score model and the Beneish M-Score model may
highly significant signal, even before Merton's model in suggest the risk of fraud in financial reporting. Serbia's
1973 and 1974 on hazardous debt. Structural modelers non-financial reporting should improve with the
like Merton and KVM increasingly include market implementation of a new accounting law that compels
equity as an important part of their models. non-financial reporting for large legal organizations that
are public interest entities in 2020.
In terms of formulae, the Altman Z-score is a bit off the
beaten path; it's not a well-known one, and its usage has Altman The Z score is a probability estimate rather than
diminished over time. It is still useful as a quick way to a forecast. Although a company's financials may
assess a company's credit rating, and it also provides an indicate that bankruptcy is imminent, management may
overall picture by calculating each ratio of financial be able to improve the situation. However, for the astute
health. As you go through the computations, you'll see investor, keeping an eye on this figure and gaining
which organizations have stronger balance sheets and insight into a company's solvency is prudent. The Z
make better use of their assets to generate income than Score isn't designed to forecast when a company will
others that are suffering. The formula seems difficult at declare bankruptcy. It is instead a measure of how
first, but as we've seen, it's simple to follow if you break closely a company resembles previous companies that
it down into its component pieces. The most difficult have gone bankrupt, attempting to predict the risk of
part is figuring out where to look for each piece of economic failure.
information; once you figure that out, it's a piece of
cake. 7. CONCLUSION
The significance of forecasting bankruptcy years before
it occurs cannot be overstated. Such forecasts may assist The implications of this research study are multifaceted
various stakeholders in assessing the state of a firm with and can be of significant value for various stakeholders,
which they are engaged or want to be associated. including businesses, management, investors, and
Furthermore, the ability to forecast corporate difficulty researchers. The findings of this study can help
and bankruptcy is a valuable instrument for ensuring the struggling companies understand the impact of their size
survival of businesses on the edge of collapse. As a on their performance and survival. By identifying the
result, Altman's Z-score models expose high-value factors contributing to their financial distress, they can
instruments to all interested parties. For Z-statistics, it is take timely corrective measures to prevent failure and
not necessary to predict when a firm will go bankrupt. improve their financial stability. This study also offers
As a result, a company should be aware that this data insights into the critical performance indicators that
implies that it has to take action for its current financial influence a company's likelihood of bankruptcy. With
situation to improve. In addition to lenders and potential this information, management can make informed
investors, other interested parties may find this decisions and adopt proactive strategies to ensure the
information useful in reducing credit risk or indicating long-term success of their firms, especially during
the company's bankruptcy situation. challenging economic conditions like the current global
financial crisis, moreover by understanding how the size
It is essential to assess the limitations of this test before of a company affects its performance and survival,
adopting it. No one uses the Altman Z-score for start- investors can make more informed decisions about
ups that haven't yet made any money or have no cash which companies to invest in, thereby managing their
flow to speak of. It is also important to note that risk exposure more effectively. Given the importance of
accounting processes and financial statements must be listed companies in driving economic growth, this
honest for this test to provide reliable results. research offers valuable insights into how firms can
Consumers External financial statements are likely to adapt and perform under adverse economic conditions.
have a difficult time differentiating between fraudulent By understanding the factors influencing their survival,
and legitimate financial data when making various these companies can better navigate financial challenges
company choices since managers' inside knowledge is and contribute to a more resilient global economy.
crucial to the assessment and possible manipulation of
accounting data (investments, loans).

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In summary, this research study has critical implications as a longer period. It's possible, for example, that the
for understanding the factors that influence business results are more noticeable before and during times of
performance and bankruptcy risk. By exploring the role crisis, which might be investigated by looking at past
of the Altman z-score model in evaluating the financial crises and recessions. Furthermore, Qualitative data,
health of listed companies, the study offers valuable such as management qualities and changes in
insights that can help businesses, investors, and management style, may be considered in future studies.
researchers. The next paths of study might involve the creation of a
collection of indicators as predictors of non-financial
8. FUTURE RESEARCH AND and financial features, enabling the early signaling of
LIMITATIONS the success or failure of organizations.

Because the study only included seven global 9. ETHICAL CONSIDERATION

corporations, the small sample size may have limited
the generalizability of the findings. Consequently, The Altman Z-Score Bankruptcy Model was a widely
additional research to increase the sample size would be used financial tool for assessing bankruptcy risk. While
beneficial. Future research is needed to examine the it offered valuable insights for decision-making, it was
predictive power of the models and the efficiency of the essential to consider the ethical implications of using
models can be compared with other predictive models this model. This study aimed to explore the ethical
that can predict the financial bankruptcy of different considerations surrounding the application of the
corporations. The Z-Scores should be supplemented Altman Z-Score Bankruptcy Model retrospectively. The
with other credit risk models, such as Ohlson's O-Score, analysis focused on the potential biases, conflicts of
to reinforce and validate the findings. Another area interest, privacy concerns, and the impact on
where further study is needed is the results of market stakeholders in the context of using this model for
timing and pecking order theory before and after the bankruptcy prediction.
financial crisis. It could be interesting to utilise a bigger
sample size than what is done here in this study, as well

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Mohammad Asif Sadhana Tiwari Ashish Saxena

College of Administrative and Financial Sharda School of Business Studies, Sharda School of Business Studies,
Science Sharda University, Sharda University,
Saudi Electronic University, Greater Noida Greater Noida
Riyadh 11673 India India
Saudia Arabia [email protected] [email protected]
[email protected] (MA) ORCID 0000-0003-3786-3398 ORCID 0000-0001-8661-932X
ORCID 0000-0001-6643-6796

Sharad Chaturvedi Shashank Bhardwaj

Operations and Business Analytics, Sharda School of Business Studies,
Jaipuria Institue of Management, Sharda University,
Indore Greater Noida
India India
[email protected] [email protected]
ORCID 0000-0002-6749-0062 ORCID 0009-0006-3609-7053

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