A Study on the Financial Health of Companies in BSE100 and its relationship with the share prices using Altman Z Score Model

Abstract

Businesses are enterprises which produce goods or render services for profit motive. To newlinebe able to predict the financial soundness of a business has led to many research works. newlineFinancial ratios are a key indicator of financial soundness of a business. Financial ratios newlineare a tool to determine the operational and financial efficiency of business undertakings. newlineThere exist a large number of ratios propounded by various authors. Altman developed a newlinez-score model using ratios as its foundation. With the help of the Z- Score emerging newlinemarket model, Altman could predict financial efficiency/bankruptcy up to 2-3 years in newlineadvance. The research concentrates on analyzing various companies performance based newlineon the Z-Score model and comparing the stock returns in-depth. newlineFinancial data for calculating Z-score measures is obtained from the annual reports of newlineeach company and historical stock quotes are used to calculate stock returns. The paper newlinethen attempts to establish a relationship between the two calculated variables: Z-scores newlineand stock returns. newlineThe Altman Z-score emerging market score below 1.8 means the company is probably newlineheaded for bankruptcy, while companies with scores above 3.0 are not likely to go newlinebankrupt. The lower/higher the score, the lower/higher the likelihood of bankruptcy. newline