Altman's Z-score model and its bankruptcy predictive ability

Abstract

Investing and managing cash flow efficiently helps market participants making profits and becomes successful. However, not anyone joining the market has the financial background to evaluate the opportunity they have, whether it is worth funding or it would turn out to be a huge mess. Altman’s Z-score model provides a simple way to help investors decide better. The model includes five financial ratios which best describes company’s performance such as growth, leverage, liquidity, and profitability. Despite the model popularity, its bankruptcy prediction ability is still in controversy over years since the model is quite old and people are worried about its adaption and score interpretation might not accuracy as the 60s period. Thus, the re-estimated in this thesis would try to overcome the above drawbacks of the model by using Vietnamese market database in recent decade (2007-2017). The re-estimated model would focus on manufacture industry of Vietnam and also conducted based on multivariate discrimination analysis (MDA) approach. The analysis in this thesis shows that re-estimated model works reasonably well in Vietnam market, with a prediction accuracy of 83.33 % compares to the original model by Altman. Keywords: Altman’s z-score, bankruptcy prediction, MDA, Vietnam manufacture.