Enterprise Bankruptcy Risk Analysis-World Credit Organization

3.13 Risk Analysis of Enterprise Bankruptcy

1. The meaning of corporate bankruptcy

The meaning of enterprise bankruptcy includes the following two levels:

1. Substantial bankruptcy. The enterprise (long-term and continuous) is unable to repay its debts, or the enterprise has long-term and continuous liabilities higher than its assets (if this is not a temporary phenomenon, the enterprise may be liquidated according to the law, or may not enter the legal bankruptcy process for various reasons , these reasons are mainly: units or individuals that have the right to demand liquidation according to law have not filed bankruptcy proceedings).

2. Legal bankruptcy. The business was legally liquidated.

2. Bankruptcy Symptom Survey

The more common symptoms of bankruptcy are:

1. The business expands rapidly, especially the expansion accompanied by soaring borrowings;

2. The head of the company is also the chairman and general manager, and has a strong desire to dominate;

3. The company is relatively young;

4. The enterprise whitewashes or fabricates false financial statements.

We compile a bankruptcy symptom questionnaire based on the above bankruptcy symptoms.

If the answers to the above five questions are "yes", then analysts should be vigilant about the company; if more than eight questions are answered "yes", the company's bankruptcy risk is already very high.

3. Enterprise bankruptcy prediction model - Z value model

Researchers such as Professor Redward Altman from the United States and Professor Richard Taffer from the United Kingdom respectively gave the definition of the Z value model. The Z-score is calculated from several financial ratios. These ratios are used to analyze the financial health of a business, and most of the data needed to calculate the ratios can be obtained from the public statements of a business or group of companies.

The Z value model is constructed by analyzing the sample data of healthy enterprises and failed enterprises. This process requires the use of statistical analysis (multivariate analysis): select indicators that can distinguish healthy companies from failed companies; then calculate the coefficient of each indicator to build a Z-value model.

The calculation formula of the Z value model is as follows:

Z value=C1R1+C2R2+C3R3+····+CnRn

Where: R1, R2, Rn are the indicators selected by the model; C1, C2, Cn are the coefficients corresponding to each indicator.

(1) Altman model

In 1986, Professor Altman selected 33 bankrupt companies and good companies as samples among manufacturing companies, and collected relevant data from the balance sheet and income statement of the sample companies. Among the variables, five variables that are most useful in predicting bankruptcy are selected, and a discriminant function is established through comprehensive analysis: in this model, he assigns different weights to the five basic financial indicators, and adds up to generate a "Z" value, namely:

Z=0.012X1+0.014 X2+0.033 X3+0.006 X4+0.999 X5

Where: Z——discriminant function value

X1——(working capital ÷ total assets)×100

X2——(retained earnings ÷ total assets)×100

X3——(profit before interest and tax ÷ total assets)×100

X4——(total market value of common stock preferred stock ÷ total book value of liabilities)×100

X5——sales revenue ÷ total assets

This model organically connects the indicators X1 and X4 that reflect the solvency of the enterprise, the indicators X2 and X3 that reflect the profitability of the enterprise, and the indicator X5 that reflects the operating ability of the enterprise, and analyzes and predicts the financial failure of the enterprise through the comprehensive score or the possibility of bankruptcy. According to this model, generally speaking, the lower the Z value, the more likely the company will go bankrupt.

In the Altman model, if a company's Z score is higher than 2.99, then the company will not go bankrupt, and if the company's Z score is lower than 1.81, then the company has a potential bankruptcy risk.

The number of samples selected by the Altman model is relatively small, and they are all data from American companies. Since then, researchers have developed other predictive models. The principles of these models are the same as the Z value model, but the selected financial indicators and index coefficients are different. It can be argued that the Z-model applicable to the United States does not necessarily apply to other countries, and the Z-model applicable to one industry does not necessarily apply to other industries.

(2) Taffler model

Professor Taffler developed another Z value model based on British enterprises. There are four indicators in this model.

Z=0.53X1+0.13X2+0.18X3+0.16X4

Where: Z——discriminant function value

X1——(profit before tax ÷ average current liabilities)×100

X2——(current assets ÷ total liabilities) × 100

X3——(current liabilities ÷ total assets) × 100

X4 - the number of days between no credits

In the Taffler model, a Z-score below 0 is considered a signal of bankruptcy risk.

4. Enterprise bankruptcy prediction model - A value model

The defect of the Z value model is that the model ratios are all calculated based on the financial data provided by the public statements of the enterprises. However, some enterprises in financial distress often whitewash the financial statements or fabricate false financial statements. With this in mind, John Argenti proposed the A-value model in his book "Business Bankruptcy".

Argenti believes that poor management can lead to bankruptcy. And mismanagement will be manifested through many phenomena, such as: the general manager and the chairman of the board are held by the same person. The consequences of poor management include: the accounting system is not perfect, and the enterprise cannot respond to market changes.

Argenti also believes that poorly managed companies are prone to make the following mistakes:

1. Excessive trading;

2. There is a problem with the large-scale project being promoted;

3. The financial financing ratio is very high.

Argenti also believes that there will be a series of signs of deterioration in poorly managed companies:

1. Deterioration of financial ratios;

2. Management begins to whitewash financial statements or fabricate false financial statements;

3. Deterioration of non-financial indicators;

4. The company entered a recession in the last few months.

Argenti lists most of the phenomena of mismanagement in the A-value model, and assigns the highest score to each phenomenon. When testing a company, it is enough to give the corresponding score according to the performance of the company. The total score is 100 points, and if the enterprise scores more than 25 points, then the enterprise has potential bankruptcy risk.

Calculation of A value

The above content is excerpted from "ICE8000 Credit Investigation, Analysis, and Rating" (written by Fang Bangjian, free to use, but please indicate the source)