5
© IJEDR 2019 | Volume 7, Issue 1 | ISSN: 2321-9939 IJEDR1901065 International Journal of Engineering Development and Research (www.ijedr.org) 362 An Analysis Of Financial Distress Of Selected Public Sector Enterprises Of India Using Zmijewski X-Score Model 1 Dr. Anu Verma, 2 Jyoti Pandit 1 Assistant Professor, 2 Research Scholar, 1 Dr. A.P.J. Abdul Kalam Govt. College, Dokmardi, Silvassa, U.T. of D & NH. 2 P.G. Department of Business Studies, Sardar Patel University, Vallabh Vidyanagar 388120. _____________________________________________________________________________________________________ Abstract - Financially distress is a situation where a company incurs losses and is unable to pay off its financial liabilities leading to its winding up. So, here the researchers have attempted to predict financial distress of selected public sector enterprises of India using Zmijewski’s X–score model. In order to analyze financial distress, six listed, worst performer, manufacturing public sector enterprises have been selected. All data were extracted from the secondary sources for the period of five years staring from 2011-12 to 2015-16. The collected data were analyzed by using microsoft excel software. The result showed that out of six, two public sector enterprises suffered from financial distress and the rest of four public sector enterprises were found in solvent or non–financial distress position. Key words - Financial Distress, Zmijewski X–score Model, Central Public Sector Enterprises (CPSEs), etc. _____________________________________________________________________________________________________ INTRODUCTION The role of public sector enterprises is very important for maximizing social welfare and upholding public interest, but after LPG reforms number of loss making public sector enterprises have increased. In order to reduce unnecessary locking up of funds in public sector enterprises, conversion of them into private sector enterprises and disinvestment took place. This indicates financial distress situation of public sector enterprises where they incur losses and unable to pay financial debt. Hence, it is the requirement of present era to predict financial distress in advance to avoid bankruptcy. Prediction of financial distress also helps stakeholders in taking rational investment decisions. Hence, in this research paper, the researchers have attempted to analyze financial distress of selected public sector enterprises using Zmijewski X-score model. LITERATURE REVIEW (M.noor salim and sudiono, 2017): The main purpose of this research was to determine the bankruptcy possibilitility of 19 coal mining companies listed in Indonesia Stock Exchange using Altman Z-score,Springate S-score & Zmijewski X-score models for the period from 2011 to 2014. It was found that Zmijewski model was the most accurate predictive model as compared to Altman Z-score & Springate S-score models. (m.Hutabarat, 2017): Here, the researcher has analyzed financial distress of 10 listed companies in the banking sector at Indonesia Stock Exchange by using Springate and Zmijewski models. The result showed that all the 10 companies are in financial distress category. (chadha, 2016): This paper explored financial performance of 196 firms listed on the Kuwait Stock Exchange for the period from 2009 to 2014 using Zmijewski X-score and Altman Z-score models. The result of Altman Z-score model showed that 25.94% firms were on average distressed zone and Zmijewski X-score model could not be justified due to inconclusive results and absence of bankruptcy law in kuwait. (sinarti and tia maria sembiring, 2015): This research paper analyzed bankruptcy of 11 listed maufacturing companies by using Altman Z-score, Springate S-score and Zmijewski X-score models to find out singnificance between all threee models. Linear regression and t-test were used to prove the hypothesis. The results showed that there was no singnificant difference in the prediction of Altman Z-score and Springate S-score models but there is a significant difference among all the three models. (Avenhuis, 2013): The main objective of this research paper is to test the bankruptcy prediction models with their original statistical techniques and examine the role of accounting ratios and test all the bankruptcy prediction models with logit regression by using Altman Z-score, Ohlson O-score and Zmijewski X-score for 14 bankrupt and 326 non-bankrupt firms for the study period 2011-12 and estimation sample covers period 2008-2010. The results showed the highest accuracy of Zmijewski X-score model among all the three models. The author suggested re-estimation of the coefficient of bankruptcy models with a specific and bigger sample to improve the predictive power. (Rahmadini,): In this paper, the researcher has analysed and compared the bankruptcy potency of the Pt.smartfren Telecom,tbk from 2010 to 2014 by using Altman Z-score, Springate S-score, Zmijewski X-score and Grover G-score models. The analysis and comparison showed the bankruptcy as per all four models for the Pt.smartfren Telecom,tbk from 2010-2014. RESEARCH GAP From the above literature review, it was found that several researches were carried out to predict financial distress by using Altman Z-score, Springate S-score, Zmijewski X-score, Ohlson O-score & Grover G-score models in all over the world. Out of

An Analysis Of Financial Distress Of Selected Public ... · and absence of bankruptcy law in kuwait. (sinarti and tia maria sembiring, 2015): This research paper analyzed bankruptcy

  • Upload
    vuphuc

  • View
    213

  • Download
    0

Embed Size (px)

Citation preview

© IJEDR 2019 | Volume 7, Issue 1 | ISSN: 2321-9939

IJEDR1901065 International Journal of Engineering Development and Research (www.ijedr.org) 362

An Analysis Of Financial Distress Of Selected Public Sector Enterprises Of India Using Zmijewski

X-Score Model 1Dr. Anu Verma, 2Jyoti Pandit

1Assistant Professor, 2Research Scholar, 1Dr. A.P.J. Abdul Kalam Govt. College, Dokmardi, Silvassa, U.T. of D & NH.

2P.G. Department of Business Studies, Sardar Patel University, Vallabh Vidyanagar 388120. _____________________________________________________________________________________________________ Abstract - Financially distress is a situation where a company incurs losses and is unable to pay off its financial liabilities leading to its winding up. So, here the researchers have attempted to predict financial distress of selected public sector enterprises of India using Zmijewski’s X–score model. In order to analyze financial distress, six listed, worst performer, manufacturing public sector enterprises have been selected. All data were extracted from the secondary sources for the period of five years staring from 2011-12 to 2015-16. The collected data were analyzed by using microsoft excel software. The result showed that out of six, two public sector enterprises suffered from financial distress and the rest of four public sector enterprises were found in solvent or non–financial distress position. Key words - Financial Distress, Zmijewski X–score Model, Central Public Sector Enterprises (CPSEs), etc. _____________________________________________________________________________________________________ INTRODUCTION The role of public sector enterprises is very important for maximizing social welfare and upholding public interest, but after LPG reforms number of loss making public sector enterprises have increased. In order to reduce unnecessary locking up of funds in public sector enterprises, conversion of them into private sector enterprises and disinvestment took place. This indicates financial distress situation of public sector enterprises where they incur losses and unable to pay financial debt. Hence, it is the requirement of present era to predict financial distress in advance to avoid bankruptcy. Prediction of financial distress also helps stakeholders in taking rational investment decisions. Hence, in this research paper, the researchers have attempted to analyze financial distress of selected public sector enterprises using Zmijewski X-score model.

LITERATURE REVIEW (M.noor salim and sudiono, 2017): The main purpose of this research was to determine the bankruptcy possibilitility of 19 coal mining companies listed in Indonesia Stock Exchange using Altman Z-score,Springate S-score & Zmijewski X-score models for the period from 2011 to 2014. It was found that Zmijewski model was the most accurate predictive model as compared to Altman Z-score & Springate S-score models. (m.Hutabarat, 2017): Here, the researcher has analyzed financial distress of 10 listed companies in the banking sector at Indonesia Stock Exchange by using Springate and Zmijewski models. The result showed that all the 10 companies are in financial distress category. (chadha, 2016): This paper explored financial performance of 196 firms listed on the Kuwait Stock Exchange for the period from 2009 to 2014 using Zmijewski X-score and Altman Z-score models. The result of Altman Z-score model showed that 25.94% firms were on average distressed zone and Zmijewski X-score model could not be justified due to inconclusive results and absence of bankruptcy law in kuwait. (sinarti and tia maria sembiring, 2015): This research paper analyzed bankruptcy of 11 listed maufacturing companies by using Altman Z-score, Springate S-score and Zmijewski X-score models to find out singnificance between all threee models. Linear regression and t-test were used to prove the hypothesis. The results showed that there was no singnificant difference in the prediction of Altman Z-score and Springate S-score models but there is a significant difference among all the three models. (Avenhuis, 2013): The main objective of this research paper is to test the bankruptcy prediction models with their original statistical techniques and examine the role of accounting ratios and test all the bankruptcy prediction models with logit regression by using Altman Z-score, Ohlson O-score and Zmijewski X-score for 14 bankrupt and 326 non-bankrupt firms for the study period 2011-12 and estimation sample covers period 2008-2010. The results showed the highest accuracy of Zmijewski X-score model among all the three models. The author suggested re-estimation of the coefficient of bankruptcy models with a specific and bigger sample to improve the predictive power. (Rahmadini,): In this paper, the researcher has analysed and compared the bankruptcy potency of the Pt.smartfren Telecom,tbk from 2010 to 2014 by using Altman Z-score, Springate S-score, Zmijewski X-score and Grover G-score models. The analysis and comparison showed the bankruptcy as per all four models for the Pt.smartfren Telecom,tbk from 2010-2014.

RESEARCH GAP From the above literature review, it was found that several researches were carried out to predict financial distress by using Altman Z-score, Springate S-score, Zmijewski X-score, Ohlson O-score & Grover G-score models in all over the world. Out of

© IJEDR 2019 | Volume 7, Issue 1 | ISSN: 2321-9939

IJEDR1901065 International Journal of Engineering Development and Research (www.ijedr.org) 363

all these models, Zmijewski X-score model has highest accuracy rate to predict financial distress in two years, but a very few researches have been carried out to predict financial distress of public sector enterprises especially using Zmijewski X-score model. Hence, in this research paper, the researchers have attempted to analyze financial distress of selected 6 public sector enterprises using Zmijewski X-score.

OBJECTIVE OF THE STUDY The main objective of this research paper is to analyze the financial distress of selected public sector enterprises using Zmijewski X-score model.

FORMULATION OF HYPOTHESIS H0: There is no significant difference in Zmijewski X-score of selected public sector enterprises. H1. There is a significant difference in Zmijewski X-score of selected public sector enterprises.

RESEARCH METHODOLOGY The said research work is analytical in nature. The study has been carried out on the basis of secondary data only. Annual Reports (financial statements) are collected from the websites of respective public sector enterprises. The researcher has selected six Public Sector Enterprises using non probability purposive sampling techniques. The criteria for selection of samples are as under:

• The companies which are listed on the recognized stock exchange i.e.BSE • loss making CPSEs as per the Loksabha’s starred question NO.*27 for reply on loss making CPSEs on 19.07.2016 • belongs to the manufacturing cognate group out of five Cognate Group of Public Sector Enterprises

Following companies are selected on the basis of above mentioned criteria. BEML 1. Bharat Earth Movers Limited (BEML) 2. Chennai Petroleum Corporation Limited (CPCL) 3. Hindustan Organic Chemicals Limited (HOCL) 4. Mangalore Refinery and Petrochemicals Limited (MRPL) 5. Scooters India Limited (SIL) 6. National Fertilizers Limited (NFL)

ZMIJEWSKI X-SCORE MODEL This is one of the probit models adopted by Zmijewski in 1984 by using 40 bankrupt and 800 non–bankrupt industrial firms’ data for the period from 1972 to 1978. Equation: Zmijewski X–score = -4.336-4.513(X1) +5.679 !" +0.004(X3) Where, X1 = %&'()*+,&

1

.+'/0122&'22

X2 = .+'/045/6505'5&23

.+'/0122&'2

X3 = 89::;<=>??;=?

89::;<=@ABCADA=A;?

If x score ≥0.5 = bankrupt or financially distressed company and if xFGHIJ <0.5 = solvent company. (M.noor salim and sudiono, 2017)

DATA ALALYSIS & FINDINGS YEARS CALCULATION INTERPRETATION4

-4.336 -4.513 (X1)

5.679!"

0.004 (X3)

RESULTS5

X- SCORE 2015-16 -4.336 -0.0559 2.90797 0.01007 -1.4739 -1.4739<0.5 =Solvent

2014-15 -4.336 -0.0063 3.11 0.0089 -1.2235 -1.2235<0.5=Solvent

2013-14 -4.336 -0.2277 3.1980 0.0087 -1.1521 -1.1521<0.5= Solvent

1 For the calculation of Zmijewski X-score, Net Income = Profit/Loss after tax and before extraordinary items.

2 Total assets = Sum of all current and Non-current assets 3 Total liabilities = Sum of all short-term and long-term liabilities4 Interpretation for the company: If x score ≥0.5 = bankrupt or financially distressed company and if xFGHIJ <0.5

= solvent company. 5 Results = Zmijewski X–score = -4.336-4.513(X1) +5.679 !" +0.004(X3)

Where, X1 = L;=M<NOP;QO=BD>??;=?

X2 = QO=BD@ABCADA=A;?QO=BD>??;=?

X3 = 89::;<=>??;=?

89::;<=@ABCADA=A;?

© IJEDR 2019 | Volume 7, Issue 1 | ISSN: 2321-9939

IJEDR1901065 International Journal of Engineering Development and Research (www.ijedr.org) 364

2012-13 -4.336 +0.071 3.4085 0.00797 2.5596 2.5596>0.5 =Financially distressed

2011-12 -4.336 -0.0508 3.17950 0.0082 -1.1911 -1.1911<0.5= Solvent

Table No. 1: Zmijewski X-score of BEML for the study period from 2011-12 to 2015-16 The similar calculation has been carried out for the rest of the companies and the results are as follow: Table No. 2: Zmijewski X-score of the selected public sector enterprises for the study period from 2011-12 to 2015-16.

ZMIJEWSKI X-SCORE Name of the selected Central Public Sector

Enterprises Year X-score Whether the company is financially distressed or solvent?

Chennai Petroleum Corporation Ltd.

2015-16 -0.8085 -0.8085<0.5 = Solvent

2014-15 0.50393 0.50393>0.5 = Financially Distressed

2013-14 0.7436 0.7436>0.5 = Financially Distressed

2012-13 1.0960 1.0960>0.5 = Financially Distressed

2011-12 -0.1107 -0.1107<0.5 = Solvent

Hindustan Organic Chemicals Ltd.

2015-16 21.2982 21.2982>0.5 = Financially Distressed

2014-15 14.17 14.17>0.5 = Financially Distressed

2013-14 8.5319 8.5319>0.5 = Financially Distressed

2012-13 4.334 4.334>0.5 = Financially Distressed

2011-12 1.9401 1.9401>0.5 = Financially Distressed

Mangalore Refinery and Petrochemicals Ltd.

2015-16 0.2403 0.2403<0.5 = Solvent

2014-15 0.6938 0.6938>0.5 = Financially Distressed

2013-14 0.2627 0.2627<0.5 = Solvent

2012-13 0.0990 0.0990<0.5 = Solvent

2011-12 -0.3795 -0.3795<0.5 = Solvent

Scooters India Ltd.

2015-16 -1.9332 -1.9332<0.5 = Solvent

2014-15 -1.849 -1.849<0.5 = Solvent

2013-14 6.49106 6.49106>0.5 = Financially Distressed

2012-13 -0.6065 -0.6065<0.5 = Solvent

2011-12 6.0758 6.0758>0.5 = Financially Distressed

National Fertilizers Ltd.

2015-16 -0.9837 -0.9837<0.5 = Solvent

2014-15 -0.7101 -0.7101<0.5 = Solvent

2013-14 -0.700 -0.700<0.5 = Solvent

2012-13

-0.67030 -0.67030<0.5 = Solvent

2011-12 -0.2962 -0.2962<0.5 = Solvent

(Source: Computed from the annual reports of the selected public sector enterprises) The above table no.1 and 2 show calculated X-score value of selected public sector enterprises. It was observed that the X-score was greater than 0.5 for the company like Hindustan Organic Chemicals Ltd. So, Hindustan Organic Chemicals Ltd. was found

© IJEDR 2019 | Volume 7, Issue 1 | ISSN: 2321-9939

IJEDR1901065 International Journal of Engineering Development and Research (www.ijedr.org) 365

financially distressed for the study period from 2011-12 to 2015-16. National Fertilizers Ltd. was found solvent as its X-score was less than 0.5 for the study period from 2011-12 to 2015-16. BEML was found solvent except in the year 2012-13. Chennai Petroleum Corporation Ltd.’s X-score was found greater than 0.5 from the year 2012-13 to 2014-15 indicating financially distressed situation of the company except in the year 2011-12 and 2015-16. Mangalore Refinery and Petrochemicals Ltd.’s X-score also indicated solvent position of the company except in the year 2014-15. Scooters India Ltd. was found financially distressed for the initial period 2011-12 and 2013-14.

Table No.3: Average X-score of selected public sector enterprises for the study period from 2011-12 to 2015-16.

(Source: Computed from the annual report of all public sector enterprises)

Chart No. 1: Average X-Score of selected public sector enterprises for the study period 2011-12 to 2015-16

Above table & chart indicate the average X-score of selected public sector enterprises for the study period from 2011-12 to 2015-16. From the above table, it can be said that as X-score of Bharat Earth Movers Ltd., Chennai Petroleum Corporation Limited, Mangalore Refinery and Petrochemicals Ltd., National Fertilizers Ltd. and Scooters India Ltd. were found less than 0.5, they possessed solvent position while Hindustan Organic Chemicals Limited was at financially distressed position with high X-score.

HYPOTHESIS TESTING ANOVA: Single Factor Analysis for Hypothesis Testing of X-Score Model H0: There is no significant difference in X-score of selected public sector enterprises H1: There is a significant difference in X-score of selected public sector enterprises

Table No. 3: ANOVA, Single Factor Analysis for Hypothesis Testing of X-Score Model

ANOVA (Single Factor Analysis) Source of Variation SS df MS F P-value F crit

Between Groups 422.32 5.00 84.46 6.10 0.00 2.62 Within Groups 332.29 24.00 13.85

Total 754.61 29.00 INFERENCE Above table shows the analysis of variance of X-Score. F-value is 6.10 and P-value is 0. As P-value is less than 0.05, we cannot accept the null hypothesis. It means that there is a significant difference in X-score of selected public sector enterprises during the study period.

-0.5

0.28

10.05

0.181.64

-0.67-202468

1012

AVERAGEX-SCORE

AVERAGEX-SCORE

NAME OF THE PUBLIC SECTOR ENTERPRISES AVERAGE X-SCORE INTERPRETATION Bharat Earth Movers Ltd. -0.50 Solvent

Chennai Petroleum Corporation Ltd. 0.28 Solvent Hindustan Organic Chemicals Ltd. 10.05 Financially Distressed

Mangalore Refinery and Petrochemicals Ltd. 0.18 Solvent Scooters India Ltd. 1.64 Financially Distressed

National Fertilizers Ltd. -0.67 Solvent

© IJEDR 2019 | Volume 7, Issue 1 | ISSN: 2321-9939

IJEDR1901065 International Journal of Engineering Development and Research (www.ijedr.org) 366

SUGGESTION Hindustan Organic Chemicals Limited and Scooters India Ltd. are the most financially distressed public sector enterprises as per Zmijewski X-score. So, it is mandatory for it to take precautionary steps to increase profit & decrease liability in order to avoid bankruptcy. LIMITATIONS OF THE STUDY

1. The study is based on secondary data, taken from the published annual reports and websites. The reliability of findings are contingent upon the accuracy of data published in said sources.

2. The study considered only six loss making and manufacturing public sector enterprises which were listed on BSE. 3. The time period covered is of five years only. 4. The researchers have used only Zmijewski X-score model to predict the financial distress and other tools have been

ignored. 5. The data have been collected using purposive sampling method.

CONCLUSION The researchers have selected six listed public sector enterprises to analyze financial distress and results revealed that 2 out of 6 public sector enterprises namely Hindustan Organic Chemicals Limited and Scooters India Ltd. were the most financially distressed public sector enterprises as per Zmijewski X-score model making it mandatory for them to take precautionary measures for increasing profit & decreasing liability in order to avoid bankruptcy in near future. The rest of public sector enterprises like Bharat Earth Movers Ltd., Chennai Petroleum Corporation Limited, Mangalore Refinery and Petrochemicals Ltd. & National Fertilizers Ltd. were in solvent position. REFERENCES [1] Kothari C. R., (2004) Research Methodology: Methods and Techniques, New Age International (p) Ltd., New Delhi. 2nd

Edition. [2] . (n.d.). Retrieved april 5, 2017, from http://www.bing.com/search?q=listed+cpse&PC=UCFBS&FORM=SETmkt=en-i [3] PRC report,government of India (2017). ,Delhi-110054.: Controller of Publications,Delhi-

110054..https://bsnljtoje.com/3rd-prc-recommendation-revised-pay-scales/ (retrieved on 5th april,2017 2:12) [4] Avenhuis, J. o. (2013, November 13). Testing the generalizability of the bankruptcy prediction models of Altman ,ohlson

and zmiewski for dutch listed and large non-listed firms. university of Twente , 1-43. [5] chadha, P. (2016). Exploring the finacial performance of the listed companies in kuwait stock exchange using Altman's z

score model. International Journal of Economices & management science , 5 (3), 3-18. [6] m.Hutabarat, f. (2017). Analysis of the bankruputcy potential using finacial distress model of springate and zmijewski model

in banking sub-sector companies listed at indonesian stock exchange. global conference on business and finace proceedings , 12, 32-40.

[7] M.noor salim and sudiono. (2017). an analysis of bankruptcy likelihood on coal mining listed firms in the indonesian stock exchange :an altman,springate and zmijewski approaches. eurasian journal of economics and finance , 3 (5), 99-108.

[8] sinarti and tia maria sembiring. (2015, January ). bankruptcy prediction analysis of manufacturing companies listed in Indonesia stock exchnage. international journal of economics and finacial issues , 354-359.

[9] Outecheva, N. (2007). Corporate Financial Distress: An Empirical Analysis of Distress Risk. ph.d tesis, University of St.Gallen , Graduate School of Business Administration, Economics, Law and Social Sciences (HSG) .

[10] Rahmadini, A. A. (n.d.). An analysis of the bankruptcy potency of the company withaltman z score,springate ,zmijewski and grover model (case study on pt.smartfrentelecom ,thk). universitas widyatama bandung .

[11] Rajasekar,T; Sania Ashraf ;Malabika Deo. (2014). An Empirical Enquiry on the Financial Distress of Navratna Companies in India. Journal of Accounting and Finance , vol. 14(3), 100-110.

[12] Edward I. Altman ; et.al. (2014, july 9). Distressed Firm and Bankruptcy prediction in an international context: a review and empirical analysis of Altman’s Z-Score Mode. 1-48.

[13] Financial Performance of Central Public Sector Enterprises -Report.(2016) [14] https://ycharts.com/glossary/terms/zmijewski_score WEBSITES

1. http://www.scootersindia.com 2. http://www.nationalfertilizers.com 3. http://www.hocindia.com 4. http://www.mrpl.co.in 5. http://cpcl.co.in 6. http://www.bemlindia.com 7. https://bsnljtoje.com/3rd-prc-recommendation-revised-pay-scales/ (retrieved on 5th april,2017 2:12) 8. http://www.investopedia.com/terms/t/total-liabilities.asp 9. http://www.investopedia.com/terms/t/total-assets.asp 10. http://www.investopedia.com/terms/t/current-assets.asp 11. http://www.investopedia.com/terms/t/current-liabilities.asp 12. http://www.investopedia.com/terms/t/net-income.asp