Using the Altman Z-Score Model to Forecast the Financial Distress of a Subset of NIFTY 50 Companies in the Indian Stock Market

The financial stability of a company has a significant impact on the growth of a country and the well-being of society. Financially sound companies safeguard stakeholders' funds and utilize them for the benefit of society and the nation. This study aims to assess the financial distress status of selected NIFTY 50 companies in the Indian Stock Market. Out of the 50 NIFTY 50 companies, only those outside the finance industry were chosen for analysis. The researcher utilized the financial statements of these companies as secondary data for the period 2022-23. This research paper is descriptive and analytical in nature. The Altman Z-Score model was used by the researcher to measure the financial distress of the companies, revealing that out of the 39 selected companies, 9 are in a state of bankruptcy.


Introduction
The financial stability of a company greatly impacts its operations. Financial instability jeopardizes a company's survival and leads to its demise. The corporate sector suffered significant consequences from the financial crisis of 2008 and the subsequent recession. Despite increasing debt, business profitability sharply declined. Corporate failure is a prevalent issue in both emerging and developed economies. By taking preventive measures, a company facing bankruptcy may mitigate the severe consequences of a complete collapse. In light of the 2008 global financial crisis and the failures of major American and European organizations, stakeholders now have an even greater need to assess the financial health of their organizations. Businesses must be capable of meeting their debt obligations to sustain operations and expansion.
Liquidity refers to the ability to sell an asset at its fair market value to meet ongoing cash flow requirements or unexpected financial demands. Liquidity risk entails the possibility that a company may not have the necessary cash or liquid assets to fulfill its financial commitments. Qeios, Another study by Panigrahi in 2019 examined the validity of Altman's Z-Score model. The researcher analyzed financial data from companies over a five-year period, ranging from 2012 to 2017. The study found that the average Z-Score was 5.9, indicating that the pharmaceutical industry was in a safe zone.
In a research conducted by Ningsih S in 2018, titled "Analysis Method of Altman Z-Score Modifications to Predict Financial Distress in the Automotive and Components Subsector of Publicly Listed Companies," the financial distress of automotive sector companies from 2012 to 2016 was examined. The study included a sample of 64 companies, and it was discovered that several of these companies were experiencing financial distress, as identified using the Altman Z-Score model. Qeios ID: XN0WTW · https://doi.org/10.32388/XN0WTW 2/10 companies were analyzed to calculate the Z-Score value.
(Edward A, 2017) conducted research on "Financial Distress Prediction in an International Context." The objective of this study was to predict financial distress in an international setting.
Context "A Review and Empirical Analysis of Altman's Z-Score Model" -The researcher measured the performance of the Z-Score model for thirty-one European and three non-European countries. Non-financial private companies were selected as samples, and the researcher concluded that the Z-Score model performs well compared to other models in predicting financial distress of companies. concluded that the working capital to total assets ratio was the most significant variable.

Research Problem
It is crucial to detect financial distress in its early stages in order to facilitate the implementation of appropriate steps and strategies to overcome it. If a company goes bankrupt, the costs associated with the bankruptcy are borne by all stakeholders. Therefore, early identification of financial distress is beneficial for the well-being of all company stakeholders. When a company is unable to generate sufficient cash flows to meet its obligations, it gradually falls into financial distress. This research aims to assess the position of selected companies, determining whether they are in a safe financial position or nearing the distress zone.

Research Objective
The objective of this research is to evaluate the financial distress status or financial health of the selected companies using the Altman Z-Score Model.

Review of Altman Z score Model
The Altman Z-Score model was originally developed by Edward I. Altman in 1968. The original sample consisted of 66 corporations, with 33 companies in each group, covering the period from 1946 to 1965. The researcher utilized secondary data, such as income statements and balance sheets of the companies. Out of the 22 financial ratios used by Altman, five standard ratios were identified and analyzed. These ratios are as follows: Table 2 shows the formulas for the ratios used in the Altman Z-Score Model. their total capitalization. It helps determine the financial health and liquidity position of the company.

R2: Retained Earnings to Total Assets Ratio: Retention of earnings is crucial for a company's business expansion. This
ratio also indicates the firm's leverage, as a higher retention ratio compared to total assets indicates less reliance on debt for capital financing.
R3: EBIT to Total Assets Ratio: This ratio measures the actual productivity of a company's assets, independent of tax and leverage factors. It provides insights into the company's operational efficiency and profitability.
R4: Market Value of Equity to Total Liabilities Ratio: This ratio determines how much a company's assets would need to decline in value before its liabilities (current and non-current) exceed its assets, leading to insolvency. It indicates the company's ability to withstand financial losses.
R5: Sales to Total Assets Ratio: This ratio defines the sales-generating capacity of a company's assets. It helps evaluate the company's efficiency in utilizing its assets to generate revenue. Table 3 shows the ratios of selected companies from the NIFTY 50 Measurement of Financial Health: According to Altman, the following guidelines can be used to determine whether a firm is financially sound or bankrupt.    Based on the analysis above, the researcher concluded that out of the selected 39 companies of NIFTY 50, 15 companies belong to the "Too Healthy" Zone. These companies have no worries about bankruptcy, and the stakeholders' money is safe.
Among the selected 39 companies of NIFTY 50, 15 companies belong to the "Healthy Zone." This indicates that these companies need to improve their financial health. If they improve their financial condition, they will not fail. However, if they do not improve their financial condition, there is a possibility of bankruptcy within two years.
Among the selected 39 companies of NIFTY 50, 15 companies belong to the bankruptcy zone. The financial statements of these companies are not favorable. The companies in this bankruptcy zone are shown in Figure 1.
Limitations of the Study: The main limitation of this study is that it is solely based on the Altman Z-Score model. The financial distress status is determined solely by this model, and other models or tools could provide stronger concluding statements.
The data utilized in this study is purely secondary data, so any discrepancies in the data may affect the reliability of the findings.
The research analyzed data for the period of 2022-23, so the time period can be a limitation of the study.