Financial Distress and Forewarning Bankruptcy: An Empirical Analysis of Textile Sector in Pakistan

Abstract

This study aims to measure the financial distress and forewarn bankruptcy in Textile Sector of Pakistan using popular statistical measures i.e., Z-Score, O-Score, Probit and D-Score. First, applicable financial ratios (profitability, liquidity, leverage, market ratios) and scores (Z-Score, O-Score, Probit and D-Score) of all 77 textile companies were calculated then estimated scores were compared with cut-off point of respective model. Based on findings, models are categorized in two groups: (a) Group-I (Z-Score and O-Score), (b) Group-II (Probit and D-Score). Results indicate that some of the textile firms are about to face financial distress in near future, which could ultimately lead those firms to bankruptcy. The findings of Group-I indicate that about 43% - 44% companies in the textile sector are in the phase of financial distress; whereas the results of Group-II reveal that about 8% - 16% companies are in financial distress phase. Thus, we could draw two conclusions: (1) the two models (Z-Score and O-Score) in Group-I were found to be robust for assessing financial distress and (2) the two models (Probit and D-Score) in Group-II were found to be less rigorous in forecasting financial distress. The previous studies attempted to compare the prediction accuracy of various models by examining the data of both financially distress firms and financially stable firms. But this study is aimed to foretell bankruptcy using comprehensive models (Z-Score, O-Score, Probit and D-Score), to compare the consistency of results across all four models of the study and to categorize financially stable and financially distress companies under each model. The findings of the study are expected to be beneficial at coutry level, firm level and indiviual level such as government and regulatory bodies of Pakistan can intervene to avert bankruptcy rate, management can devise appropriate strategies to reduce financial distress. Moreover. investors can safeguard their investment by making right decissions based on the findings.