Financial Distress & Bankruptcy

7/24/2019 Financial Distress & Bankruptcy

1/25

Financial Distress &

BankruptcyDr. Kumar Bijoy

Financial Consultant

[email protected]!""##
mailto:[email protected]:[email protected]


2/25

$ick %nustrial Company

' (rm is sai to )e )ankrupt if it is una)leto meet its current o)li*ations to thecreitors.

+he $ick %nustrial Companies ,$pecial-roisions/ 'ct 198! or $%C' e(nes asick inustry as an inustrial company,)ein* a company re*istere for not lessthan (e years/ 2hich has at the en ofany (nancial year accumulate lossese3ual to or e4ceein* its net 2orth5.


3/25

6eak 7niton $$%

' non:$$% unit is Weak if itsaccumulation of losses as at the enof any accountin* year resulte inthe erosion of (fty percent or moreofits peak net 2orthin the immeiately

precein* four accountin* years.


4/25

$ick$$% unit

$ick $$% unit ,as per ;B%/< 2hen anyof its )orro2e account has )ecomea ou)tful aance i.e. principal or

interest in respect of any of its)orro2e account has remaineoerue for perios e4ceein* t2o

an half years an there is erosion innet 2orth ue to accumulate cashlosses to the e4tent of !0= or more

of its peak net 2orth urin* the


5/25

%n case of any tiny>ecentrali?esector units if re3uisite (nancialata is not aaila)le a unit may )econsiere as sick if theloan>aance in 2hich any amount to

)e receie has remaine past uefor one year or more.


6/25

Business Failure

Causes of Business Failure< conomic factor ,A.1=/

%nustry 2eakness poor location etc

Financial factor ,.A=/

er leera*in* insucient capital e*lect isorer an frau ,1.0=/

ther factors ,1.#=/

$ource< Dun & Brastreet %nc. Business failurerecor


7/25

BankruptcyFactors

4ternal factors

Earket recession

Chan*e in ot policies

%ncrease competition -rolon*e -o2er supply or fuel supply cuts

-rolon*e scarcity of ;E an Ga)or

Chan*es in consumer )uyin* pattern

$hrinkin* eman

%nae3uate funs

atural calamities


8/25

%nternal factors -oor plannin*

Eismana*ement

Frauulent practices anmisappropriation of funs )y themana*ement

Ga)or unrest

+echnolo*ical o)solescence

Disputes amon* promoters


9/25

Causes of )ankruptcy;B%stuy

Cause percentage

Eismana*ement !"

Faulty initial plannin* 1Ga)or pro)lem "

Earket recession "A

thers 9

100


10/25

$ymptoms of Bankruptcy

-rouction< Go2 capacity utili?ation

Hi*h operatin* cost

Failure of prouction lines

'ccumulation of (nishe *oos

$ales an marketin*< Decline in sales

Goss of istri)ution to competitors


11/25

Finance< %ncrease )orro2in* at e4or)itant rates

%ncrease )orro2in* a*ainst assets

Delay in paya)les like salaries interestetc

Default at term loans

persistent cash losses


12/25

thers< ' eclinin* tren in market price per

share

;api turnoer of key personal

Fre3uent chan*es in accountin* policies

Fre3uent chan*es in accountin* years

for uneclare reasons


13/25

-reiction of )ankruptcy

' stuy of (nancial ratios for ! years,)efore sickness/ are useful in preictin*the failure of a (rm

Eoels use for preictions are< Beaer Eoel

6ilco4 Eoel

Blum EarcIs Failin* Company Eoel

'ltmanIs J score Eoel

'r*enti $core Boar

G C upta Eoel


14/25

Beaer Eoel First to make a conscious eort to use

(nancial ratios as preictors of failure.

De(ne failure as ina)ility to pay its(nancial o)li*ation as they mature5

7se A0 ratios classi(e uner # cate*ories +he ratio of cash Lo2 to total e)t 2as

foun to )e the )est sin*le preictor offailure.

+he stuy further reeale that (nancialratios are useful in preiction of failure of atleast (e years prior to eent.


15/25

6ilco4 Eoel

et li3uiation alue ,GM/ of the(rm is the )est inicator of its(nancial health.

GM is the ierence )et2eenli3uiation alue of (rmIs asset anlia)ilities.

Gi3uiation alue is the market alueof the assets an lia)ilities ifli3uiate at that point of stuy


16/25

Blum EarcIs Failin* Company Eoel

-reicts the (nancial health of a (rmusin* 1" ratios iie into A *roups< Gi3uiity ratios

-ro(ta)ility ratios

Maria)ility ratios

%t trie to accurately preict failure anra2 a istinction )et2een )ankrupt annon:)ankrupt (rms


17/25

'ltmanIs J score Eoel

Base on the fact that arious ratios2hen use in com)inations can hae)etter preictie a)ility than 2hen

use iniiually. "" ratios consiere in arious

com)inations.

7se multiple iscriminant analysis,ED'/ to istin*uish )et2een)ankrupt an non:)ankrupt (rms.


18/25

ut of these "" ratios a (nal set of !ratios 2ere selecte as they 2erefoun to )e )etter preictorIs of

failure.

6ei*hts 2ere *ien to these ratioson the )asis of their si*ni(cance to

preict health of the (rm. J:score eelope on the )asis of

these ratios is< Z = 1.2X1+ 1.4X2+

3.3X3+ 0.6X4+ 1.0X5


19/25

Z = 1.2X1+ 1.4X2+ 3.3X3+ 0.6X4

+ 1.0X5

J N iscriminant score

O1N 2orkin* capital>+otal 'ssets

O"N ;etaine arnin*s>+otal 'ssets

OAN B%+>+otal 'ssets ON EM of e3uity>BM of e)t

O!N $ales >+otal 'ssets

Z Score Class!caton

P1.81 Bankrupt (rm

1.81 Q ".99 'rea of i*norance

R".99 Healthy (rm


20/25

'r*enti $core Boar

S. 'r*enti in his article TCompany FailureQ Gon* ;an*e preiction is ot nou*hIeelope a score )oar for ealuatin*

the health of the (rm. +he moel is )ase on the numerical

assessment of the (rmIs 2eaknesses.

+he 2eaknesses are classi(e as< Defects

Eistakes

$ymptoms


21/25

Defects< in mana*ement score

8 +he C is an autocrat He is also the chairman

" -assie )oar Qan autocrat 2ill see to that

" 7n)alance )oar Q too many en*ineers or too many(nance types

" 6eak (nance irector 1 -oor mana*ement epth

1! -oor response to chan*e ol fashione proucto)solete factory ol irectors out:of:ate marketin*

A o )u*ets or )u*etary controls A o cash Lo2 plans

A o costin* system

43 total" pass s#oul$ %e less t#an 10


22/25

Eistakes

1!< Hi*h leera*e (rm coul *et intotrou)le

1!< ertrain* Co. e4panin* faster

than its funin* Capital )ase too small 1!< Bi* project *one 2ron*

45 total" &ass s#oul$ %e less t#an15


23/25

$ymptoms

< (nancial si*ns such as J:score appear nearfailure

< Creatie accountin* C is the (rst to see si*nof failure an in an attempt to hie it from creitors

an the )anks an accounts are *losse oer5 )yoeraluin* stocks lo2er epreciation etc.

< on Q (nancial si*ns such as untiy ocesfro?en salaries lo2 morale hi*h sta turnoer

rumors 12" total score

100" 'ran$ total &ass s#oul$ %e less t#an 25


24/25

G C upta Eoel

First %nian Eoel propose to preictfailure

He use !# ratios cate*ori?e aspro(ta)ility ratios an )alance sheetratios.

+he moel 2as foun to hae a hi*h

e*ree of accuracy in preictin*sickness for ":A years )efore failure.


25/25

;atios

-ro(ta)ility

BD%+> et $ales

CF>$ales

BD%+> ,+otal 'ssets U 'ccumulateDepreciation/

CF> +'

BD%+> ,%nterest U 0."! De)t/

Balance sheet 6>+otal De)t

'll >$ Gia)ilities>+an*i)le 'ssets

Documents

Financial Distress & Bankruptcy