Kussainova Dinar
2nd year master student of Finance
New
Economic University T.Ryskulov
METHODS OF ANALYSIS OF PROBABILITY OF BANKRUPTCY
Today it has not yet developed a single universal method for estimating
the bankruptcy of organizations that can used both in international and in
domestic practice, as evidenced by the numerous attempts of scientists to solve
this problem by constructing new models. However, these methods are currently
used for predicting bankruptcy, it is advisable to consider all bankruptcy
evaluation methods.
Key words:
bankruptcy, financial management, Altman Z-model.
Techniques
of bankruptcy are a financial analysis of the target system, aimed at
identifying the parameters of a crisis development of the company, generating
threat of bankruptcy in the coming period.
Depending on
the goals and methods of bankruptcy diagnostics is divided into two major
systems:
1) a system
of rapid diagnosis of bankruptcy;
2) a
fundamental system of diagnostics of bankruptcy.
Express
Bankruptcy diagnostics characterizes the system regularly assess the financial
parameters of the crisis development of the company, carried out on the basis of
the data of its financial accounting standard algorithms analysis. The main
purpose of rapid diagnosis of bankruptcy is the early detection of signs of a
crisis of development of the enterprise and the preliminary assessment of the
extent of the crisis of his condition.
Financial
management practices in the assessment of the scale of the crisis of the
financial condition of the company are three fundamental characteristics:
• easy
financial crisis;
• a deep
financial crisis;
• financial
disaster.
Rapid diagnosis
of the bankruptcy system provides early warning signs of the crisis the company
and allows us to take swift action to neutralize them. Its preventive effect is
most noticeable on the stage lung enterprise financial crisis. At some level of
the crisis of the financial condition of the company, it necessarily must be
supplemented by a fundamental diagnostic system.
The
fundamental characteristic of bankruptcy diagnostics system parameter estimates
of the financial crisis the company's development, carried out on the basis of
factor analysis and forecasting techniques.[1]
The main
objectives of the fundamental diagnosis of bankruptcy are:
• deepening
the results of the evaluation parameters of the crisis of financial development
of the enterprise, obtained in the process of rapid diagnosis of bankruptcy;
•
acknowledgment of receipt of a preliminary assessment of the extent of the
crisis of the financial condition of the company;
•
forecasting the development of individual factors, generating threat of bankruptcy,
and their negative consequences;
• evaluation
and prediction of the enterprise's ability to neutralize the threat of
bankruptcy due to internal financial capacity.
Identification
of the extent of the crisis of financial condition should include analysis and
forecast of the fundamental diagnosis of bankruptcy and identify possible areas
of the restoration of the financial balance of the enterprise.
A
significant part in determining the probability of bankruptcy of the enterprise
belongs to the financial analysis.
Analysis and
evaluation of the balance sheet structure is based on the coefficient of
performance coatings and equity ratio.
The most
widely used model of Edward Altman. One of the simplest is the two-factor model
based on the coverage ratio, which characterizes the ratio of liquidity and
financial dependence that characterizes the level of financial stability.
Two-factor
model is calculated using the formula (1.1):
Z = -0,3877 - 1,0736 * A + 0.579 * B, (1.1)
B= Leverage
ratio, calculated as the ratio of debt to total assets.
For
businesses that have Z = 0, the probability of bankruptcy is 50%. If Z <0,
then the default probability is less than 50% and then decreases with
decreasing Z. If Z> O, then the default probability is greater than 50% and
increases with Z.
However,
this model does not provide a high accuracy of prediction of bankruptcy,
because it takes into account the impact on the financial condition of the
enterprise coverage ratio and leverage ratio and does not account for the
influence of other important indicators (profitability, return of assets and
business activity of the enterprise). This regard is large prediction error. In
addition, about the weight values of the coefficients and
constants, appearing in the model, we only know what they found empirically.
For example, two-factor model was developed based on an analysis E. Altman US
Financial 19 state enterprises, bankruptcy five-factor model was built on the
basis of their study data 66 companies, half of which went bankrupt in
1946-1965 years, Which also carries a process of extrapolation errors relevance
to the 40-60-ies., on contemporary reality. In this regard, they do not
correspond to the specifics of the modern economic environment and business
organization in Kazakhstan, including different accounting system and tax law,
and so on. D.
Next model Altman
- five-factor - is also not without drawbacks in terms of applicability in
Kazakhstan, however, on its basis in our country developed and used in practice
computer model predicting the probability of bankruptcy.
Altman
Modelis calculated using the formula (1.2):
Z = 1,2A + 1,4B + 3,3C +
0,6D + 1,0E(1.2)
Where - A = the share of working capital in assets.
B = Return on assets, calculated based on the retained earnings, i.e., the
ratio of retained earnings to total assets.
C = Return on assets, calculated at book value (i.e., the ratio of earnings
before income % of total assets.
D =Coverage ratio of the market value of equity, i.e. the ratio of market value
of equity to current liabilities.
E =the return of all assets, i.e. the ratio of revenue from sales to total
assets.
A modified version of the formula Altman's prediction is calculated
using the formula (1.3):
Z = 0,717 *
K1 + K2 + 0.847 * 3.107 * 0.42 * K3 K4 K5 + 0.995 * (1.3)
where - K1 =
working capital / total assets;
K2 = Net
income (loss) / total assets;
K3 = profit
before tax / total assets;
K4 = equity
/ debt capital;
K5 = revenue
from sales / total assets.
If the value
of the index Z <1,23, then the probability of bankruptcy is very high. If
Z> 1,23, the bankruptcy of the company is not threatened in the near
future.[2]
However,
such a correction is not without drawbacks, because in this case, is not
considered a possible fluctuation of the stock price under the influence of
external factors and investors' behavior, which can be regarded as an
additional issue of shares of the issuer's approach to bankruptcy and abandon
their purchase, thus reducing their market value.
Thus,
differences in the specifics of the economic situation and in the organization
of business between Kazakhstan and the developed market economies have an
impact on the very set of financial indicators used in the models of foreign
authors.
Forecast
model of the probability of bankruptcy O.P. Zaytseva. With the help of
correlation and multivariate factor analysis, it was found that the most
important role in the change of the financial situation of industrial
enterprises play Pictures, which are used in the mathematical model six
factor O.P. Zaytseva serving to count
the following special rates:
1. A - loss ratio
enterprise, characterized by the net loss ratio to equity (III Balance section)
x1 =
standard value x1 = 0;
2. B - rate
payables and receivables ratio
x2 =
standard value x2 = 1
3. C - the
aspect ratio of short-term liabilities and the liquid assets, this ratio is the
reciprocal of the absolute liquidity ratio
x3 =
standard value x3= 7;
4. D - the
loss-making sales of products, characterized by the ratio of net loss to the
sales volumes of these products
x4 =
standard value x4 = 0;
5.E - ratio
of financial leverage - the ratio of debt capital (long-term and short-term
liabilities) to its own sources of funding
x5 =
standard value x5= 0.7;
6.F - asset
utilization as the reciprocal asset turnover ratio - the ratio of the total
amount of the company's assets (balance sheet total) of total revenues,
x6 = the
standard value x6 = x6 past period.
If the
company has no loss, then put 0.
These
Pictures were the basis for the development of discriminate factor risk model
of diagnosis of bankruptcy of industrial enterprises. Comprehensive bankruptcy
rate is calculated using the formula (1.4):
K = 0.25 *
0.1 * x1 + x2 + x3 + 0.2 * 0.25 * 0.1 * x4 + x5 + x6 * 0.1 (1.4)
The
weighting values of the partial indicators for commercial
organizations were identified by the expert, and the actual complex bankruptcy
rate should be compared with a standard calculated on the basis of the
recommended minimum values of particular indices - the estimated
value of K to be compared with the K standard.
If the
actual ratio is more complex regulatory K (actual)> K (standard), the
probability of bankruptcy is great, and if it is less the probability of
bankruptcy is low.
One of the
latest methods of forecasting bankruptcy using the method of rating models is
A.V. Kolyshkin author models are different from other analytical models
construction principles: A.V. Kolyshkin selected indicators, most commonly
found in models of other researchers, and, on this basis, gave them weight. As
a result, three statistical models were obtained bankruptcy prediction. In
general, the models are calculated according to formulas (1.5), (1.6) and
(1.7):
Model number
= 1 + 0.47K1 0.14K2 0.39K3 + (1.5)
Where - K1 -
working capital to assets;
K2 - the
return on equity;
K3 - cash
flow to debt;
Model number
2 = 0.61K4 0.39K5 + (1.6)
Where - K4 -
coverage ratio;
K5 - return
on assets;
Model number
3 = 0.49K4 0.12K2 + + + 0.19K6 0.19K3 (1.7)
Where - K4 -
coverage ratio;
K5 - return
on assets;
K6 - return
on sales.
Critical
exponents model A.V. Kolyshkin presented in the table (1.1)
Table
1.1 - Critical exponents model A.V.Kolyshkin
|
Model |
Prosperous |
Bankrupt |
Uncertainty
Zone |
|
1 |
0,08-0,16 |
(-0,20)-(-0,08) |
(-0,08)-0,08 |
|
2 |
1,07-1,54 |
0,35-0,49 |
0,49-1,07 |
|
3 |
0,92-1,36 |
0,25-0,38 |
0,38-0,92 |
The apparent
advantage of rating models is the simplicity. However, methods for determining
the weight values of the indicators do not always provide the
required accuracy. The analysis of these models based on the considered
enterprise data showed that the smallest mistake is a model ¹3.
New methods
of diagnostics of possible bankruptcy, designed for enterprises and, therefore,
deprived of a plan by the authors of many disadvantages of foreign models,
discussed above, have been developed R.S. Saifulin and G.G. Kadykova. However,
in this case it was not possible to eliminate all the problems of forecasting
bankruptcy.
Some of
these indicators used, characterized by high positive or negative correlations
or functional relationship to each other. This leads to unnecessary
complication of these procedures without increasing the prediction accuracy.
Economists
R.S. Saifulin and G.G. Kadykov complex index calculated prediction of the
financial crisis:
A
comprehensive index of financial crisis prediction is calculated using the
formula (1.8):
R = 2 * R1 +
R2 + 0.1 * 0.08 * 0.45 * K3 + K4 + K5 (1.8)
Where - K1 -
a ratio of its own working capital;
K2 - the
current ratio;
K3 - asset
turnover ratio;
K4 -
management ratio, calculated as the ratio of profit to revenue from the sale;
K5 - return
on equity.
Socket data
rates of minimum regulatory levels, R = 1 value. If the value of R <1, the
financial condition of the organization - unsatisfactory, if R> 1 - quite
satisfactory.[3]
Different
models are used in the analysis of financial and economic activities of the
company assess the risks of loss of solvency, financial stability and
independence of the company for the past period. However, the organization its
partners and competitors interested in the prospects of the financial condition
of the company in the future. For specialists have developed a model of
bankruptcy prediction, which allows to predict the crisis of the commercial
organization even before its obvious symptoms. This makes it possible to use a
variety of anti-crisis strategies for its prevention.
If the
company is unable to pay its debts and finance its current core activities due
to lack of funds, it is there KZT with bankruptcy proceedings. However, in most
cases, dangerous trends can be predict and prevent.
References:
1)
Melnikov, V.D. - Finance Fundamentals [Text]: a textbook / VD Melnikov. -
Almaty: LEM, 2007. - 568 p.
2)
http://www.investopedia.com/terms/a/altman.asp
3)
Terekhin V.I. -Financial management of the firm - M .: Economics. - 2008. - 350
p.