Investigation Of Financial Soundness Of Listed Manufacturing Companies Finance Essay

The fiscal place of listed companies is an issue that every stakeholder is concerned about really much. The direction of the companies tries every agency to better the company ‘s fiscal place, and hopes to keep good tendencies in the hereafter. Investors besides pay close attending to companies ‘ fiscal place and the investing determinations they make are based on this. The survey is about the probe of fiscal soundness of listed fabrication companies for a period of 5 old ages, i.e. from 2003 to 2007. The trial of soundness as revealed by Z mark ( Altman ‘s theoretical account ) showed that the selected companies were on the brink of failure. In order to salvage the companies from entire bankruptcy, their fiscal place should be improved without any farther hold. To this purpose, hence, the necessity of qualified trained and experient direction forces, authorities realistic step, participative direction, supply of equal on the job capital, puting realistic ends, rectifying the answerability, actuating the accomplishment of public presentation and enforcing punishment for non-achievement must be ensured in the sample of selected listed companies. Hence, the appropriate authorization should take immediate steps for the remotion of bankruptcy.

Introduction

Directors, shareholders, loaners and employees are concerned about their house ‘s fiscal status ( Bum, 2007 ) . The occupation security of directors and employees is non assured should their houses struggle financially. Stockholders ‘ equity place and loaners ‘ claims are non guaranteed every bit good. Government, as a regulator in a competitory market, has concerns about the effects of fiscal hurt for houses, and it controls capital adequateness through the regulative capital demand ( Mingo, 2000 ) . This shared involvement among director, employee, investor, and authorities creates continual enquiries and recurrent efforts to reply an ceaseless inquiry about how we predict fiscal hurt, or what the recognition hazard of houses reveals ( Bum, 2007 )

Despite legion efforts to foretell bankruptcy, three decennaries after Altman ‘s seminal survey ( 1968 ) , fiscal hurt anticipation research has non reached an univocal decision. We believe that the deficiency of consensus in the survey of fiscal hurt anticipation is partly attributable to the nature of the explanatory variables, as studied for three decennaries. Before Merton ‘s ( 1974 ) proposal was applied to fiscal hurt, most surveies had used fiscal ratios as explanatory variables, and the exclusive dependance on distinct types of variables had been inevitable.

The fiscal hurt literature has been focused on happening explanatory variables that have know aparting power to distinguish financially hard-pressed companies from financially sound companies, at least one twelvemonth prior to bankruptcy. Initiated by Beaver ( 1966 ) , Altman ( 1968 ) , and Ohlson ( 1980 ) , academic surveies to mensurate fiscal exposure continued for three decennaries. Beaver found that the hard currency flow to debt ratio was the best individual ratio forecaster of hurt in his univariate discriminating analysis ( Bum, 2007 ) .

Literature Review

A theoretical account for foretelling bankruptcy sets out to set up a relationship between failure and a figure of fiscal ratios that can be calculated from a house ‘s one-year study. Timely anticipation of bankruptcy is of import for all parties involved: stockholders, directors, workers, loaners, providers, clients, the community and the authorities ( Dimitras, Zanakis and Zopounidis, 1996 ) . Bankruptcy theoretical accounts are utile to those stakeholders that are able to take action to forestall failure. Research workers frequently province explicitly that they want to bring forth an early-warning theoretical account, but in other surveies it seems besides likely that a theoretical account that can foretell failure every bit early as possible ( for illustration, in twelvemonth 4 or twelvemonth 5 prior to failure ) is aimed for. In many surveies, the theoretical account produced is based on the one-year study from twelvemonth 1 prior to failure ( e.g. Altman, 1968 ; Altman, Eom, Kim, 1995 ; Richardson, Kane, Lobingier, 1998 and Lennox, 1999 ) .

There are few articles on this topic in the literature. Altman, Haldeman and Narayanan ( 1977 ) present the ZETA theoretical account, which is a theoretical account based on one-year studies from twelvemonth 1 prior to failure ( i.e. a year-1 theoretical account ) . Models based on twelvemonth 2, twelvemonth 3, twelvemonth 4 and twelvemonth 5 were besides considered. Of the five theoretical accounts, the year-1 theoretical account proved to hold the best overall public presentation in the 5-year period prior to failure ( the detailed consequences for all five theoretical accounts are non given in the paper ) .

Beaver ( 1966 ) foremost used empirical methods to analyze corporate fiscal crisis. Beaver showed that ‘cash flow to entire debt ratio is the best variable to explicate fiscal crisis, so would be the ratio of entire debt to entire assets, net income to entire assets, working capital to entire assets and current ratio. ‘ Altman ( 1968 ) put frontward the well-known z-score theoretical account. Altman used 22 fiscal ratios and multiple discriminating analyses to choose five fiscal ratios with best explanatory ability: ‘working capital /total assets ‘ , ‘retained net incomes /total assets ‘ , ‘earnings before involvement and revenue enhancements / entire assets ‘ , ‘market value equity / book value of entire debt ‘ and ‘sales / entire assets ‘ . Altman et al. , ( 1977 ) proposed a zeta theoretical account to better the z-score theoretical account. The consequences clearly showed that there were seven variables which could suitably explicate the endeavor bankruptcy anticipation compared to the others: return on assets, stableness of net incomes, debt service, cumulative profitableness, liquidness, capitalisation and size.

The survey of Ou ( Ou, 1990 ) showed that the non-profit informations in fiscal one-year study contain information bespeaking which way corporate net incomes change to in the undermentioned twelvemonth. Ou foremost set up the campaigner variables set composed of 61 independent variables in two stairss ( the first measure was to utilize individual variable theoretical account Logit to choose 13 variables being important on degree of 10 % ; the 2nd measure was to utilize multi-variable theoretical account Logit to gauge these 13 variables, so kept those important at the degree of 10 % ) . Finally, the last eight variables were selected: per centum growing in the ‘inventory / entire assets ‘ , per centum growing in the ‘net gross revenues / entire assets ‘ , alteration in ‘dividends per portion ‘ comparative to that of the old twelvemonth, per centum growing in ‘depreciation disbursal ‘ , per centum growing in the ‘capital expenditure/ entire assets ‘ ratio, with a 1-year slowdown, the accounting rate of return, alteration in rate of return relation to the old twelvemonth ‘s rate of return.

Lam ( 2004 ) selected 16 fiscal statement variables based on old surveies in the prognosis of fiscal public presentation: current assets/current liabilities, net sales/total assets, net income/net gross revenues, ( long-run debt+short term debt ) /total assets, entire beginnings of fund/ entire utilizations of fund, research disbursal, pre-tax income/net gross revenues, current assets/common stockholders ‘ equity, common portions traded, capital outgo, net incomes per portion ( EPS ) , dividend per portion, depreciation disbursal, revenue enhancement recess and investing recognition, market capitalisation and comparative strength index. Kiviluoto ( 1998 ) besides drew on old research in the prognosis of the company ‘s fiscal public presentation, chose four fiscal indexs: operating border, net income before depreciation and extraordinary points, net income before depreciation and extraordinary points of the old twelvemonth and equity ratio.

Chen ( 2000 ) used fiscal ratios in companies ‘ one-year studies to analyze the prediction issues in the Chinese stock market. Chen selected six fiscal ratios as explanatory variables: current ratio, entire debt / entire assets, gross revenues / entire assets, net income on entire assets, net income on equity and net income / gross revenues ( non related to the hard currency flow ratios ) . In calculating fiscal hurt of Chinese listed companies, Wu and Lu ( 2001 ) foremost chose 21 fiscal indexs, so used stepwise arrested development method to analyze them and eventually found six variables with affluent information: growing in net income, return on entire assets, current ratio, long-run debt / equity, working capital /total assets and gross revenues / entire assets.

Wu and Zhang ( 2005 ) found that industry factors and the corporate size played a great function in impacting the fiscal hurt: cost of fiscal hurt increased when the endeavor in fiscal hurt stood in a hapless concern environment, and the plus size of endeavors had a positive relationship with fiscal hurt cost. Zhang C, Zhang YP, Zhang YC Chen, and Wan ( 2006 ) selected 15 fiscal indexs to calculate EPS: equity per portion, dividend pay-out ratio, dividend per portion return on net assets, retained net incomes ratio, current ratio, speedy ratio, entire debt / entire assets, long-run debt / entire assets, gross revenues / histories receivable, gross revenues / stock list, gross border ratio, net income / gross revenues, return on investing and return on equity.

Based on the literature, assorted surveies have been conducted in the context of fiscal place or public presentation ; nevertheless, there are no sufficient surveies on fiscal soundness in the listed companies in Sri Lanka. Hence, in an effort to make full in this research spread, the present survey is initiated on an probe of fiscal soundness of listed fabrication companies in Sri Lanka: An Application of Altman ‘s Model in Sri Lanka.

Aims

The survey covers the specific aims as stated below:

To analyze the fiscal soundness of listed fabrication companies via Altman theoretical account ;

To acknowledge the fiscal soundness of listed fabrication companies in Sri Lanka ;

To propose some line of actions for work outing jobs.

Methodology

Scope

The range of the survey is the listed fabrication companies on Colombo Stock Exchange ( CSE ) , Sri Lanka. Thirty one companies are listed under fabrication sectors[ 1 ]. Hence, out of 30 one, merely 10 companies are indiscriminately selected for the intent of this survey. The companies include: ( 1 ) Abans Electrical Ltd ( ABANS ) ; ( 2 ) Acl Cables Ltd ( ACL ) ; ( 3 ) Acme Printing and Packaging Ltd ( ACME ) ; ( 4 ) Central Industries Ltd ( CIND ) ; ( 5 ) Dankotuwa Porcelain Ltd ( DPL ) ; ( 6 ) Dipped Products Plc ( DIPP ) ; ( 7 ) Kelani Cables Ltd ( KCAB ) ; ( 8 ) Lanka Aluminium Industries Ltd ( LALU ) ; ( 9 ) Parquet ( Ceylon ) Ltd ( PARQ ) ; ( 10 ) Printcare PLC ( CARE ) .

Datas Beginnings

In order to run into the aims of the survey, information was collected from secondary beginnings chiefly from the fiscal studies of the selected companies, which were published by Colombo Stock Exchange in Sri Lanka.

Dependability and Validity of the Data

Secondary informations for the survey was drawn from audit histories ( i.e. , income statement and balance sheet ) of the concerned companies ; hence, this information may be considered dependable for the intent of the survey. Necessary checking and cross checking were done while scanning information and information from the secondary beginnings. All these attempts were made in order to bring forth cogency informations for the present survey. Hence, the research worker satisfied the content cogency standard.

Tool of Data Analysis

In this context MDA theoretical account as developed by Altman ( 1970 ) may be considered worthwhile. The theoretical account can supply some unsmooth thought about the fiscal soundness of the selected listed fabrication companies in Sri Lanka. He developed the undermentioned equation for judging the fiscal soundness of an endeavor.

where:

Working capital/Total assets,

Retained earnings/Total assets,

EBIT/Total assets,

Market value of equity/Book value of entire debt, and

Sales/Total assets.

Z = Overall Index

In order to prove the overall fiscal soundness of the sample listed companies it needs to cipher the ratios of Working Capital to Total Assets, Gaining before Interest & amp ; Taxes to Total Assets, Market Value of Equity to Book Value of Total Debt and Gross saless to Entire Assets.

Consequences and Discussions

Table1 below shows the place of these ratios. It depicts the selected listed companies ‘ mean place of the ratios of Working Capital to Total Assets, Gaining before Interest and Taxes to Total Assets, Market Value of Equity to Book Value of Total Debt and Gross saless to Entire Assets.

Table 1. Positions of selected ratios of listed fabrication companies

Companies

Ratios

ABANS

ACL

Acme

CIND

DPL

DIPP

KCAB

LALU

PARQ

Care

Working capital/

Entire assets

0.051

0.332

-0.126

0.501

0.210

0.179

0.470

0.266

-0.395

0.129

Retained earnings/

Entire assets

0.053

0.867

0.020

0.098

-0.092

0.059

0.112

0.092

-0.028

0.042

Net incomes before involvement and taxes/ Total assets

0.102

0.153

0.126

0.160

-0.075

0.090

0.166

0.203

0.050

0.105

Market value of equity/

Entire debt

0.620

0.811

0.216

0.427

1.369

1.674

1.660

0.08

1.125

0.241

Sales/

Entire assets

1.539

0.946

1.001

1.597

1.004

0.939

1.015

2.323

0.728

1.027

Beginning: calculated from the figures available in the income statements and balance sheets of the companies concerned

The following tabular array ( Table 2 ) shows the company wise mean place of Z ‘s mark of the sample listed companies during the period under survey.

ABANS

ACL

Acme

CIND

DPL

DIPP

KCAB

LALU

PARQ

Care

Average

Z Mark

1.55

0.97

1.00

1.61

1.01

0.95

1.04

2.33

0.73

1.03

1.22Table 2. Analysis of Z mark

Beginning: Based on Net income and Loss histories and Balance sheet of the sample listed companies

After delegating the several mean values of X1, X2, X3, X4 and X5, in the aforementioned equations as developed by Altman ( 1970 ) , Z mark was estimated at 1.55, 0.97, 1.00, 1.61, 1.01, 0.95, 1.04, 2.33, 0.73, 1.03 and 1.22 severally for ABANS, ACL, ACME, CIND, DPL, DIPP, KCAB, LALU, PARQ and CARE. Altman ‘s decision is that houses with Z mark above 2.99 were solvent while those below of Z mark of 1.81 were bankrupt. It is apparent from Table2 above that in all sample selected listed companies, the Z values are far below 2.99. This indicates that the fiscal place of all selected listed fabricating companies in Sri Lanka appears unsound and they were seemingly on the brink of failure during the period under survey. In this connexion it needs to be mentioned here that Z score as determined by Altman to foretell belly-up and non-bankrupt places of the houses in the American Context can non be logically taken every bit standard in the context of Sri Lanka. Therefore, it can be concluded that the overall fiscal soundness of the sample listed companies during the period under survey had been worst taking to entire bankruptcy of the listed companies.

Reasoning Remarks

The fiscal place of listed companies is an issue that every stakeholder is really much concerned about. The directors of the companies try every agency to better the company ‘s fiscal place, and hope to keep the good tendencies in the hereafter. Investors besides pay close attending to companies ‘ fiscal place and the investing determinations they make are based on this. It is obvious from the above treatment that the mean fiscal place of the selected listed fabrication companies was non sound during the period under survey. Furthermore, the trial of soundness as revealed by the Z mark ( Altman Model ) showed that the selected companies were on the brink of failure. In order to salvage the selected companies from bankruptcy, the fiscal place of the selected listed companies should be improved every bit early as possible. For bettering fiscal place, hence, the necessity of qualified trained and experient direction forces, authorities realistic step, following participative direction, supply of equal on the job capital, puting realistic ends, rectifying the answerability, actuating the accomplishment of public presentation and enforcing punishment for non-achievement etc. must be ensured in the sample selected listed companies.