Abstract
This paper intends to apply the Altman Z-score model to all the companies active in the wholesale of motor vehicle parts and accessories (NACE 4531), with extended financial statements. Using the panel data model over the time series for 2008-2016 on the companies of this sector, we conclude that 99% of the Z-score is explained by the independent variables (working capital, capital structure, turnover, earnings before interest and tax), with estimated parameters very close to the model`s classical values. The sample description of the paper and the corresponding results highlight the Z-score evolution by turnover clusters and principal components, with the largest companies performing the best (the only cluster with Z-score median above 3). We notice a tendency for decreasing high-risk companies and increase in the medium risk companies, whereas the low-risk companies are relatively stable. This improvement is mostly due to the increasing capitalization rate and less external debt, despite the deteriorating working capital and operating margin. We believe that future research to evaluate Z-score sensitivity under stress test scenarios would be very useful to provide an insight into companies’ insolvency risk amid increasing interest rates and different fiscal tax on dividends.
Highlights
1.1 Literature ReviewNew York University Finance Professor Edward Altman, looking to develop a tool to be used in predicting the bankruptcy, he developed a new model using ratios, named the Altman Z-score formula in 1967, later published in 1968
Analytical model of firm’s value, Credit Metrics is a statistical model developed by J.P Morgan, the investment bank, in the year 1995, Value at risk (VAR) is a statistical risk measure used by some Indian banks, but the most relevant remain Altman Z score model, that has been consistently reported to have a 95 % accuracy of prediction of bankruptcy up to two years prior to failure on nonmanufacturing firms as well.( A.K
We applied The Altman Z-score model to all the companies active in the wholesale of motor vehicle parts and accessories, NACE 4531, with extended financial statements submitted for the entire appraised period were taken into consideration
Summary
New York University Finance Professor Edward Altman, looking to develop a tool to be used in predicting the bankruptcy, he developed a new model using ratios, named the Altman Z-score formula in 1967, later published in 1968. According to the Sanobar Anjun, Altman’s revised Z-score model is one of the most effective Multiple Discriminant Analysis, which has been researched throughout the last 40 years Beside this model to evaluate the risk of bankruptcy we know KWM Model, developed by KMV Corporation based on Merton’s (1973). Lower or decreasing values of reported results (figure on balance, the equity component) may indicate a decreasing trend of the profits, reserves erosion due to recent year’s losses or increasing dividend distribution (Koussis et al., 2017) Under these situations, the subject company exposure to external debt is increasing, making it more vulnerable to fluctuations of external financing conditions (Royer, 2017). The higher the operating margin, the more value-added is generated by the company, reducing, the risk of insolvency (Tian and Yu, 2017) This indicator shows the structure of financing and the selffinancing ability of the company (Turner, 2016). Z > 3 =>correspond for companies with a low probability of insolvency
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