Application of

Z-Score Model on
M.I. CEMENT FACTORY LIMITED

Submitted to:

Dr. Jahangir Alam

Professor
Chittagong Univrsity

Submitted by:
Shohidul Islam
ID- 1602320802389
Department of Finance
Premier University ( Faculty of Business Studies )

Date of Submission: 3rd May 2017

1.1 Introduction
The Altman Z-score is the output of a credit-strength test that gauges a publicly traded
manufacturing company's likelihood of bankruptcy. The Z Score highlights factors
contributing to a companys financial health and uncovers emerging trends that indicate
improvements or deterioration in financial condition. The Z Score helps managers align
business strategies with capital allocation decisions and provide transparency of financial
condition to lenders and equity capital providers. Business managers use the Z Score to
raise capital and secure credit. The Z Score is an effective tool to demonstrate credit
worthiness to bankers and soundness of business model to investors.

Credit decision is one of the critical area when a bank extend financial facility to their
client. From the view point of Credit Granting Decision, any bank officer analyze the
repayment capacity of borrower, risks involved in credit with a view to secure bank's
interest. Credit decision is done by Project Appraisal, Analysis of Core Financial
Statement using Z Score model. Lenders and credit analysts use Z Scores because they
are effective indicators and predictors of loan defaults. it is an important risk mitigation
tool and helps them to better price credit products based on borrowers credit worthiness.

Borrowers with higher Z Scores ratings will have a better chance of obtaining financing
and secure a lower cost of capital and preferred interest rates because lenders will have
greater confidence in being paid back their principal and interest. Financial wellness is an
indication of strong company management and that effective governance controls are in
place.

1.2 Objectives of the study

To apply the Z score model for credit granting decision for M.I. Cement Factory
Limited.
To predict the financial health and viability of M.I. Cement Factory Limited using
Z Score model.
To offer suitable suggestions.
1.3 Literature Review

The Z-score formula for predicting bankruptcy was published in 1968 by Edward I.
Altman, who was, at the time, an Assistant Professor of Finance at New York University.
The Z-Score Test lets you use statistical techniques to predict the likelihood of
bankruptcy within the next two years. Dr. Altmans test was developed using 66
companies, The test achieved an accuracy rate of 95%. The financial ratios come directly
from a companys financial statements.

The Altman Z-score is based on five financial ratios that can be calculated from data
found on a company's annual report. It uses profitability, leverage, liquidity, solvency and
activity to predict whether a company has a high degree of probability of being
insolvent.

1.3.1 Definition of Z Score

(A) Statistics

A statistical method of rescaling and standardizing data to enable easier comparison. A Z-

score measures the number of standard deviation an observation is away from the mean,
or average, of all observation. A positive Z- score indicates the observed value is above
the mean of all values, while a negative Z- score indicates the observed value is below
the mean of all values.

(B) Business

A figure that shows how likely it is that a business will fail. The Z- score is calculated
using information about the relative levels of a business's assets, sales, profits etc and is
correct about 90% of the time in calculating if a business will go bankrupt within one
year.
1.3.2 The Z-score Formula

Here is the formula (for manufacturing firms), which is built out of the five weighted
financial ratios:

Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

Where:

A = Working Capital/Total Assets

B = Retained Earnings/Total Assets

C = Earnings Before Interest & Tax/Total Assets

D = Market Value of Equity/Total Liabilities

E = Sales/Total Assets

1.3.3 Altman Z-Score Interpretation

The lower the score, the higher the odds are that a company is headed for bankruptcy.

A Z-score of lower than 1.8, indicates that the company is heading for bankruptcy.
Companies with scores above 3 are unlikely to enter bankruptcy.
Scores in between 1.8 and 3 lie in a gray area.

1.3.4 Breaking Down the Z

Now that we know the formula, it's helpful to examine why these particular ratios are
included. Let's take a look at the significance of each one:
 Working Capital/Total Assets (WC/TA)

This ratio is a good test for corporate distress. A firm with negative working capital is
likely to experience problems meeting its short-term obligations because there simply is
not enough current assets to cover those obligations. By contrast, a firm with significantly
positive working capital rarely has trouble paying its bills.

Retained Earnings/Total Assets (RE/TA)

This ratio measures the amount of reinvested earnings or losses, which reflects the extent
of the company's leverage. Companies with low RE/TA are financing capital expenditure
through borrowings rather than through retained earnings. Companies with high RE/TA
suggest a history of profitability and the ability to stand up to a bad year of losses.

Earnings Before Interest and Tax/Total Assets (EBIT/TA )

This is a version of return on assets (ROA), an effective way of assessing a firm's ability
to squeeze profits from its assets before factors like interest and tax are deducted.

Market Value of Equity/Total Liabilities (ME/TL)

This is a ratio that shows - if a firm were to become insolvent - how much the company's
market value would decline before liabilities exceed assets on the financial statements.
This ratio adds a market value dimension to the model that isn't based on pure
fundamentals. In other words, a durable market capitalization can be interpreted as the
market's confidence in the company's solid financial position.

Sales/Total Assets (S/TA)

This tells investors how well management handles competition and how efficiently the
firm uses assets to generate sales. Failure to grow market share translates into a low or
falling S/TA.
2.1 FINDINGS
 Calculating Z Value
Related Information:

2016 2015
Current Asset 8609003487 7754595168
Current Liability 6721249003 5343980908
Total Asset 14159618877 12061702982
Retained Earnings 1596350972 1221082558
EBIT 1029009706 889047384
No. of Shares 148500000 148500000
Stock Price 95 78
Total Debt 7434795022 6182373334
Net Working Capital 1887754484 2410614259
Mkt. Value of Equity 6682500000 5346000000
Sales 9016548629 8264240985

Calculating Variables:

X1=Net Working Capital/Total

0.134 0.1999
Asset
X2=Retained. Earnings/Total Asset 0.113 0.1013

X3=EBIT/Total Asset 0.073 0.0746

X4=Market Value of equity/Total
1.898 1.874
Debt
X5=Sales/Total Assets 0.637 0.6852

Z Value:

Z= 1.2(X1) + 1.4(X2) + 3.3(X3) +0.6(X4) + 1.00(X5)

2016 2015
Z Score 2.3357 2.43748
Comment

From the calculation of Z- Score, I found that, The M.I. Cement Factory Limited lies in
grey zone. As according to the Altman Z- Score model, the value of Z in 2015 is 2.43 and
in 2016 is 2.33 which is below 3. So the company is not in distress or safe zone.

As a credit analyst of commercial bank my suggestion is that the bank can grant credit to
the M.I. Cement Factory Limited but it needed more analyze and monitoring as its Z-
Score reduced from previous year and Bankruptcy cannot be predicted in Gray area.

3.1 Conclusion
The fundamental financial health of a business firm is the main concern for the
stakeholders. On the basis of the financial soundness, they take a decision regarding their
possible involvement with a particular firm. The Altman Z score is the best measurement
that can shape the decision of crdit granting. The current study has been conducted to
assess the financial health of the firm. The study revealed that M.I. Cement Factory Ltd
have avrag Z score than the benchmark (1.8 > Z >3). The firm may face financial distress
in the long run. So, the findings of the study can be useful for the managers to take
financial decision, the stockholders to choose investment options and Credit analyst can
take credit granting dcisions. In Bangladesh Z score model has also been used in different
studies. Chowdhury and Barua (2009) applied Z score model to the Z category shares
traded in DSE to judge financial distress risk of each share. They used 53 companies
data of the years 2000-2005 to calculate Z-score. They argued that the Altmans Z score
model, though may not be fully applicable for companies in Bangladesh, yet proves its
strong validity and correctness in predicting distressful status of the Z category
companies.