FINANCIAL DISTRESS PREDICTION COMPETENCE OF THE ALTMAN Z SCORE AND ZMIJEWSKI MODEL: EVIDENCE FROM SELECTED ZIMBABWE STOCK EXCHANGE FIRMS

Year 2024, , 9 - 15, 02.06.2024

Kudakwashe Mavengere , Phathisani Gumede

https://doi.org/10.17261/Pressacademia.2024.1892

Abstract

Purpose- The study aimed to assess the predictive competence of Zmijewski X score and Altman Z score in detecting financial distress in two manufacturing companies that are listed on the Zimbabwe Stock Exchange. The purpose of the study was to ascertain which of the two models is better at foretelling financial distress. The study's conclusions may aid in improving practitioners' and academics' comprehension of the relative benefits of each model and their ability to forecast financial trouble and bankruptcy.
Methodology- The Altman Z score model was employed in the study as a yardstick measure to differentiate between the safe (Z >2.99), grey (1.810) or non-bankrupt (X<0) based on the Zmijewski X score, which was also employed in the research. Two manufacturing businesses registered on the Zimbabwe Stock Exchange made up the sample size for this study, which was carried out between 2010 and 2017. The research was dependent on secondary data gleaned from the two companies' financial statements.
Findings- Manufacturing firm 1's Z-score placed the firm in the distress zone in 2010 and the grey zone in the years 2011 to 2012. From 2010 until 2017, Manufacturing Company 2 experienced financial difficulties. The two manufacturing enterprises under investigation did not exhibit bankruptcy, according to the X-score statistics. According to the study's findings, the Z-score is a better indicator of financial difficulty in emerging nations than the X-score. The Altman Z score and Zmijewski X score models are both useful in predicting financial distress in firms. However, a limitation of these models is that they constitute different financial ratios (Z-score with 5 ratios and X-score 3 ratios) and interpretation. Despite this limitation, these models are still key in unearthing financial distress in firms.
Conclusion- The study concludes that the Altman Z score is superior to the Zmijewski X score in predicting financial distress in developing countries. The Altman Z score model uses 5 financial ratios to predict whether a company has a high probability of becoming insolvent. The Zmijewski X score model uses 3 financial ratios to predict bankruptcy. The study’s findings are important for investors in protecting their investments as the model can help with informed decision making in terms of future prospects of the firm in terms of bankruptcy. There have been cases where an auditor provides an unqualified opinion of the financial statements of an entity only for the entity to be declared bankrupt after the release of the financial statements. Therefore, models such as the Altman Z score can aid in protecting investor loss as the tool can be used to determine bankruptcy, a key signal to divest from the company.

Keywords

Bankruptcy, signalling theory, Altman Z Score, Zmijewski X Score, manufacturing companies

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