Report

Report Name: A Study of the efficacy of Altmans Z score model to predict bankruptcy of Standar
d Bank.
Submitted to Md. Omar Faruk Lecturer School of Business Administration Uttara Un
iversity
Date of Submission- 02.08.2012 Word count- 2023 02th August, 2012
Uttara University

Report
Report Name: A Study of the efficacy of Altmans Z score model to predict bankruptcy of Standar
d Bank.
Submitted by Group name- Circle Group Members Saif Muhammad Fahad Rajib Sarker I
D M20911111016 M20911111028
School of Business Administration Uttara University
Date of Submission- 02.08.2012 Word count- 2023 02th August, 2012
Uttara University

Letter of Transmittal
Date: 02th August, 2012 Md. Omar Faruk School of Business Administration Uttara
University, Dhaka. Subject: Transmitting the report. Dear Sir, It is our pleasur
e to submit the report on the topic A Study of the efficacy of Altmans Z score mod
el to predict bankruptcy of Standard Bank. We have tried our best to analyze all
necessary information related to our topic and present as affectionately as poss
ible. It is not impossible that there will be minor mistakes in this report. But
still we hope that this report will provide the appropriate analysis on the top
ic of A Study of the efficacy of Altmans Z score model to predict bankruptcy of St
andard Bank. In conclusion, we want to express our thanks to you, as without your
co-operation it would barely impossible for us to prepare this report related t
o our subject. If you need any help to interpret anything of this assignment, pl
ease let me inform. Thanking you Group name: - Circle School of Business Adminis
tration Program B.B.A. Section 18th (A)

Table of content
Page No.
1. Executive summary 2. About the report 2.1 Introduction 2.2 Objectives of this
Study 2.3 Methodology of the Study 2.4 Limitation of this project 3. Interpreta
tion of Altmans Z-score 4. Data Analysis

.. 04 .. 06 .. 06 .. 07 .. 07
4.1 Calculating X1 = Working Capital/ Total Assets

4.2 Calculating X2 = Retaining Earning/ Total Assets .. 12 4.3 Calculating X3 = EBIT/

tal Assets .. 13 .. 14 .. 15 .. 16 - 17
4.4 Calculating X4 = Equity/ Book value of debt 4.5 Calculating X5 = Sales/ Tota
l Assets 5. Findings 6. Suggestion 7. Conclusion 8. References 9. Appendix

Executive Summary
This report is based on the efficacy of Altmans Z score model to predict bankrupt
cy of Standard Bank. This kind of analytical report is the pre-requisite for the
graduation in BBA. Classroom discussion alone cannot make a student perfect in
handling the real business situation; therefore, it is an opportunity for the st
udents to know about the real life situation through this program. A report has
to be built for the university and organization requirement. The topic of the re
port is A study of the efficacy of Altmans Z score model to predict bankruptcy of
Standard Bank. The main purpose of the report becomes very clear from the topic o
f the report. The report discusses about the application of Altmans Z-score model
in the particular area. This report is broadly categorized in six different par
ts. At first we give a short introduction about our report. In this part, we dis
cuss about purpose of the report, objectives of report and scope of report. In p
art two, we try to give an overview of Square hospital, about their mission, vis
ion. Here, we also try to discuss about Square floor presentation. In part three
, here we discuss about various types of services which provide by Square hospit
al. In this part, we try to highlight about customer satisfaction method of Squa
re hospital. Part four includes of methodology. In part five, we try to analyze t
he customer gap of Square hospital. Here, we find some defeats which may be decre
ase the customer satisfaction level in the future. In part six, we try give some
recommendation that how can Square overcome those defeats. Here we also give a
short conclusion.

Introduction
Altmans Z is one of the best known statistically derived predictive models used t
o forecast a firms impending bankruptcy. Edward Altman, a financial economist and
professor at New Yorks stern School of Business, developed Altmans Z score model.
The Z score gained acceptance by auditors, management accounts, and database sy
stems beginning in the mid1980s. Although, Altman originally developed the Z- sc
ore based on a small sample of manufacturing firms, some research seems to show
that it is useful in other areas, such as healthcare, with some modifications. A
ltmans Z-score formula is a multivariate formula used to measure the financial he
alth of a company and to diagnose the probability that a company will go bankrup
t within a two-year period. Studies of Altmans Z have yielded mixed results, and
recent literature questions whether or not the formula, tested in the mid-twenti
eth century on manufacturing firms, is useful in todays marketplace. The Z- score
uses various accounting ratios and market-derived price data to predict financi
al distress and future bankruptcy. The Altmans Z formula works well provided the
scores fall within the in the tails meaning that low and high scores may more accu
rately predict financial distress than scores that fall in the gray area. More m
oderate scores may be easily misclassified. In the early 2000s, Altman amended t
he formula to allow its application to certain situations not originally include
d in the original sample set.

Objectives of the report Primary objectives

The primary objectives of this report are to apply Altmans Z-score in particular
area and to evaluate the performance of Standard Bank and difficulties.
Secondary objectives
1. To measure the financial health of a bank and to diagnose the probability tha
t a bank will go bankrupt within a two-year period. 2. To determine the creditwo
rthiness of a bank. 3. To determine the risk in issuing loan for banks. 4. To de
termine the risks of the bank and to create a strategy in order to get the bank
out of the danger of bankruptcy. 5. To predict bankruptcy. 6. To know about bank
performance. 7. To know about bank condition.
Methodology
Both primary and secondary data are used here in this study for make the report
fruitful. Here, I have used the secondary sources as the main of information.
Primary sources of data
1. Face to face conversation with course teacher & faculty. 2. Informal conversa
tion with classmates.
Secondary sources of data
1. 2. 3. 4. 5. Annual report of Standard bank. Different manuals of Standard ban
k. Prospectus of Standard bank. Different papers about Altmans Z- score. Differen
t text books, magazines & websites.

Limitation
In this report, we measure just only one banks performance. We just used only 3 y
ears data of Standard Bank. We only used this Altmans Z- score model for predicti
ng bankruptcy. To continue study in such a vast area requires a big deal in time
. As for my report, I had only one month time which is not enough. But I tried m
y best. 5. To collect information, I faced difficulties. 6. The study was limite
d by the availability of the data. 7. Some of the information was contradictory.
1. 2. 3. 4.

Interpreting Altmans Z-score

Altmans Z is commonly employed to assess financial distress. Altmans Z is a weight
ed composite of financial indicators relating to profitability, revenue, slack r
esources and market return. When interpreting Altmans Z-score, higher values indi
cate that banks carry out more actions at a fast pace, while low scores indicate t
hat bank carry out low few total actions and respond slowly. Once a Z-score has be
en determined, the ratio is then compared to Altmans predetermined cutoffs. Altma
n postulated that banks with a Z-score < 1.8 were likely to experience bankruptc
y; banks with a Z-score 1.8 to 2.99 were in a zone of ignorance or a grey zone i
n which distress may or may not be impending. Last, banks with a Z-score of > 2.
99 were likely to be financially sound. However, there is no single formula that
has the power to predict the future; Z-score users should look at they interpre
t the score rather than just looking at the score itself, which is only a snapsh
ot in time.

Data Analysis & Interpretation

In this report, we use Altmans Z score bank model to calculate the performance of
Standard bank. We apply this model for predicting bankruptcy. Here, we only use
the data of the year 2009, 2010 and 2011. Now, we know that
Z= 1.2 X1+ 1.4 X2+ 3.3 X3+ 0.6 X4+ 1.0 X5
Here, X1= Working Capital / Total assets. X2 = Retained Earnings / Total assets.
X3 = EBIT / Total Assets. X4 = Market value of Equity / Book value of debt X5 =
Sales / Total Assets
X1 = Working capital/ Total asset
Working Capital: Working capital is the money available at short notice to fund
the activities of the company. Working capital is calculated by subtracting the
current short- term debts from the cash and cash equivalents. A company with a p
ositive working capital can immediately pay their short term debts, when the cre
ditors want the company to pay. If a company generates profits, working capital
will grow, unless they give away all profits. Total Assets: Total assets are all
assets on the balance sheet of a company. This concerns both the cash and the p
roperties for which a longer- term investment was needed. We know that, Working
Capital (WC) = Current assets Current liabilities.

So, Working Capital of Standard Bank is

Year 2009 2010 2011
Current Assets (less than 1 year) 25,026,274,953 40,700,542,223 43,903,238,957
Current liabilities Working Capital= Current assets (less than 1 year)
Current liabilities
21,013,390,663 37,866,216,682 40,550,631,172
4,012,884,290 2,834,325,541 3,352,607,785
Year 2009 WC TA X1 (WC/TA) 4,012,884,290 49,002,321,693 0.08189 2010 2,834,325,5
41 66,612,938,096 0.04254 2011 3,352,607,785 74,704,359,093 0.04487
0.09 0.08 0.07 0.06
Ratio
0.05 0.04 0.03 0.02 0.01 0 2009 2010 2011 X1
Year
Fig: Ratio of X1

X2 = Retain Earning /Total Assets

Retain Earning: The retaining earning is the sum of all profits earned in the pa
st, that is was available to reinvest in the company. This refers to the total p
rofits minus dividends and taxes. For young companies, this figure is relatively
low, because they had fewer years to build up their retained earnings. Also com
panies in emerging markets will usually have less retained earnings, just becaus
e most companies in these markets will be young companies. Total Assets: Total a
ssets are all assets on the balance sheet of a company. This concerns both the c
ash and the properties for which a longer- term investment was needed.
Year 2009 RE TA X2 (RE/TA) 516,874,255 49,002,321,693 0.01054 2010 908,330,212 6
6,612,938,096 0.01363 2011 899,885,888 74,704,359,093 0.01204
0.016 0.014 0.012
Ratio
0.01 0.008 0.006 0.004 0.002 0 2009 2010 2011 X2
Year
Fig: Ratio of X2

X3 = EBIT/ Total Assets

EBIT: EBIT is all profits before taking into account interest payments and incom
e taxes Total Assets: Total assets are all assets on the balance sheet of a comp
any. This concerns both the cash and the properties for which a longer- term inv
estment was needed.
Year
Interest/ Profit Total profit/loss paid on deposit & before tax borrowing 3,351,
065,292 4,126,218,727 6,023,905,930 1,293,061,015 2,384,552,317 2,413,996,150
EBIT = Total profit/loss before tax+ Interest/ Profit paid on deposit & borrowin
g
2009 2010 2011
4,644,126,307 6,510,771,044 8,437,902,080
Year 2009 EBIT TA X3 (EBIT/TA) 4,644,126,307 49,002,321,693 0.09477 2010 6,510,7
71,044 66,612,938,096 0.09774 2011 8,437,902,080 74,704,359,093 0.11295
0.115 0.11 0.105 0.1 0.095 0.09 0.085 2009 2010 2011 X3
Ratio
Year
Fig: Ratio of X3

X4 = Total Equity Amount/ Total liability or book value of debt

Total Equity Amount: A type of mutual fund that invests in high-quality companie
s with a reliable history of dividend payments and growth in the dividend rate.
Total liability: The amount of the debt can be gathered from the balance sheet.
Both long term and short term debt are part of this parameter. The reserve, whic
h is also on the credit side of the balance sheet, is no part of this parameter.
Year 2009 Total Equity Amount Total liability X4 (Total Equity
Amount/Total liability)
2010 5,641,982,331 60,970,955,765 0.09253
2011 6,956,440,140 67,747,918,953 0.10268
4,230,535,359 44,771,786,339 0.09449
0.104 0.102 0.1 0.098
Ratio
0.096 0.094 0.092 0.09 0.088 0.086 2009 2010 2011 X4
Year
Fig: Ratio of X4

X5 = Interest Income or sales/ Total Assets

Interest Income: The difference between the revenue that is generated from a ban
k s assets and the expenses associated with paying out its liabilities. Total As
sets: Total assets are all assets on the balance sheet of a company. This concer
ns both the cash and the properties for which a longer- term investment was need
ed.
Year 2009 Interest Income TA X5 (Interest
Income/TA)
2010 5,849,984,579 66,612,938,096 0.08782
2011 8,099,284,291 74,704,359,093 0.10841
4,433,634,888 49,002,321,693 0.09047
0.12 0.1 0.08
Ratio
0.06 0.04 0.02 0 2009 2010 2011 X5
Year
Fig: Ratio of X5

Findings
Now, Z= 1.2 X1+ 1.4 X2+ 3.3 X3+ 0.6 X4+ 1.0 X5 For the Year of 2009, Z = (1.20.08
189) + (1.40.01054) + (3.30.09477) + (0.60.09449) + (1.00.09047) = 0.098268 + 0.0147
56 + 0.312741 + 0.056694 + 0.09047 = 0.572929 For the Year of 2010, Z = (1.20.042
54) + (1.40.01363) + (3.30.09774) + (0.60.09253) + (1.00.08782) = 0.051048 + 0.01908
2 + 0.322542 + 0.055518 + 0.08782 = 0.995442 For the Year of 2011, Z = (1.20.0448
7) + (1.40.01204) + (3.30.11295) + (0.60.10268) + (1.00.10841) = 0.053844 + 0.016856
+ 0.372735 + 0.061608 + 0.10841 = 0.613453
1.2 1
Output of "Z"
0.8 0.6 0.4 0.2 0 2009 2010 2011 Z
Year Fig: Output of Z

We know that, If Z> 2.99: Classified as financially sound. Z< 1.81: Classified a
s financially distressed or bankrupt. Here all the outcome figure of Z is less t
han 1.81. So, we can say that Standard bank is financially distressed or bankrup
ted for the last three years.
Suggestion

Conclusion
Although many performance indicators cannot be expected to incur a strong cue tha
t a strategy does not yield the expected results, Altmans Z is argued by the some
to be broad enough of an indicator for managers to notice. In other words, Altma
ns z may be employed to indicate financial distress. In this report, we have ende
avored to show the efficacy of the Altmans Z-score in predicting financial distre
ss in banks. Our goal has not been to suggest that Altmans Z is an end-all soluti
on to predicting financial distress. However, we do suggest that it resides in t
he managers and investors toolbox for diagnosing the possibility of future financi
al distress.

Reference
1. Administrative Office of U.S. Courts. (2009). Bankruptcy statistics. Informat
ion retrieved on July, 2009, From http://www.uscourts.gov/bnkrpctystats/bankrupt
cystats.htm 2. Blockbuster gets going concern notice-SEC filing. (2009, April 6)
. Thomson Reuters. Information retrieved http://www.reuters.com/article/rbssReta
ilSpecialty/idUSN0641432620090406 3. Bakers Footwear Group Reports Fourth quarte
r and Fiscal 2008 Results. (2009, April 15). Thomson Reuters. Information retrie
ved from http://www.reuters.com/article/pressRelease/idUS99202+15-Apr2009+BW2009
0415
Appendix
1. Balance Sheet photocopy of Standard Bank of 2009, 2010 & 2011. 2. Income Stat
ement photocopy of Standard Bank of 2009, 2010 & 2011. 3. Liquidity Statement ph
otocopy of Standard Bank of 2009, 2010 & 2011.