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International Journal of Economics, Commerce and Management Research Studies
Volume 1, Issue 2, September - 2018
The issue of bankruptcy prediction and the financial conducted a study of using the models for bankruptcy of
soundness of companies has captured the attention of many Zmijewski, Altman, and Springate as predictors on delisted
researches for over 50 years, but that attention has increased companies in Indonesia Stock Exchange. The sample was
after the financial crises that hit the financial markets in recent obtained from 30 companies delisting ranging from 2003 to
years causing many companies to file for 2009 with a comparison of 30 companies are still listed on the
bankruptcy.Zmijewski (1984) used the following definition of Stock Exchange. He concluded that Zmijewski model was the
financial distressed firms: “the act of filing a petition for most precise in predicting the delisting of companies. Aminian
bankruptcy”. Platt and Platt (2002) define financial distress as et al. (2016) conducted a study that included 35 companies
a late stage of corporate decline that precede the more from textile and ceramic and tile companies listed on the
destructive event, which is bankruptcy. According to McKee Tehran Stock Exchange during the period 2008 to 2013. By
(2003) there are several events that a company goes through comparing the results of Altman model, Springate model,
before going into bankruptcy. He mentioned that inadequate Grover model, and Zmijewski model, they concluded that
income and inadequate liquid asset position as the two stages Zmijewski model was statistically significant in predicting
before bankruptcy.Sormunen and Lailinen (2012) stated that financial crises. Djamaluddin et al. (2017) examined the
the process of financial distress also consists of several stages, financial soundness of 20 Japanese electronic manufacturing
which are; companies during the period 2009-2015 to measure the effect
of the global financial crisis on them. They concluded that
Early stage: In this stage,a decline in profitability in the Zmijewski model was able to achieve an accuracy rate in
financial statements is observed. detecting bankruptcy of 53.57%.
Late stage: The decline in profitability is accompanied by a
rise in leverage in the financial statements. II. DATA AND METHODOLOGY
Final stage: The decline in profitability is accompanied by
the increase in leverage and the decline in liquidity in the The results presented in this research were based on the
financial statements. annual financial data that were obtained from the annual
reports of the eight companies listed under the oil and gas
In determining the financial soundness of companies, sector at Kuwait stock exchange over the period 2010 to 2017.
Zmijewski X-score model is one of the most used models. In The annual reports and financial data were downloaded from
developing the X-score model, Zmijewski (1984) used the the Kuwait stock exchange website and the Kuwait Institute of
data of 40 bankrupt and 800 non-bankrupt industrial firms’ for Banking Studies database.
the period 1972–1978. He claimed that the model achieved
99% accuracy rate in determining the bankruptcy of Zmijewski (1984)X-score model is the most commonly
companies two years prior to it. Zmijewski (1984) model is used model by accounting researchers (Grice and Dugan,
based on accounting variables unlikeShumway (2001) and 2003), it adopts a probit method to model bankruptcy which
Hillegeist et al. (2004) where they are based on market uses financial ratios measuring firm’s performance, leverage,
variables. Agarwal and Taffler (2008) compared the and liquidity. The ratios were selected on the basis of their
performance of market-based and accounting-based performance in the previous studies. The model used 40
bankruptcy prediction models in a study that covered all non- bankrupt and 800 non-bankrupt industrial firms’ data for the
finance industry UK firms fully listed on the London Stock period 1972–1978. The constructed probit function with the
Exchange (LSE) during the period 1985-2001. They variables and estimated coefficients from the study of
concluded that accounting-based models were better due to Zmijewski (1984) are as follows:
many reasons such as bankruptcy is not a sudden event but is
Zmijewski X-score = −4.3 − 4.5𝑋1 + 5.7𝑋2 + 0.004𝑋3
the result of several years of adverse performance and these ……………………. (1)
financial performances can be captured by the financial
statements of the firm. Another reason they stated is that loan Where
covenants of firms are generally based on accounting numbers
X1 = Net income / Total assets = ROA
and this information is reflected in the financial statements of
X2 = Total liabilities / Total Assets
the firms. They also mentioned that accounting-based models X3 = Current assets / Current liabilities = Current ratio
are popular among practitioners because the necessary data for
the market-based models are not always available. Unlike Altman's Z-model, Zmijewski X-Score does not
have criteria threshold values to compare the results against.
There have been numerous studies comparing the
Many such as Djamaluddin et al. (2017) divided the X-score
accuracy of financial distress models. Avenhuis (2013) obtained from Zmijewski model into two classes. If the X-
examined the prediction power for Altman, Ohlson and score is negative (X-Score <0), then the company is classified
Zmijewski for Dutch companies for the period 2005-2012. in a healthy condition. Contrariwise, if the X-score is positive
When the original statistical techniques were used, the
(X-Score ≥ 0) then the company can be classified under
accuracy rates for the validation sample for the models of
unsanitary conditions or likely to lead to financial distress.
Altman (1968), Ohlson (1980), and Zmijewski (1984) models
The ratios used to calculate the X-score are shown in table 2.
are respectively 80.6%, 93.8%, and 95.3%. Fatmawati (2012)
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International Journal of Economics, Commerce and Management Research Studies
Volume 1, Issue 2, September - 2018
Zmijewski (1984) model selected ratios that reflect the
firm'sperformance, leverage, and liquidity. In measuring the
performance side, he used return on assets (ROA) for it.
Return on assets (ROA) measures how efficient the company
is in generating income. The higher ROA a company achieves
the better financial position it will be in keeping it away from
the bankruptcy risk. The higher this ratio indicated that the
company is in better position to honor its obligations towards
its creditors. Bever et al. (2005), using NYSE data found that
the mean ROA of non-bankruptcy firms is relatively higher
than that on the bankruptcy firms’ and the bankrupt firms’
ROA decreased over the four years prior to bankruptcy. Millar
and Chen (2004) found a negative relationship between firm
ROA and bankruptcy risk.
The activities of any company are funded through debt required for equity financing. For measuring leverage,
and equity (Bhandari& Weiss, 1996). The existence of this Zmijewski used total liabilities to total assets. The average
debt, resulting in an obligation to make periodic payments, is total liabilities to total assets ratio for the sector during the
one of the biggest factors contributing to the risk of financial study period was 39.92%. SHC had the best ratio of 15.24%
distress. The greater the financial leverage, the higher the compared to other companies working in the sector followed
chance of financial distress and bankruptcy as periodic by EHHC. On the other side, IPG had the highest ratio making
payments have to be made on the debt which are often not it more exposed to financial stress.
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International Journal of Economics, Commerce and Management Research Studies
Volume 1, Issue 2, September - 2018
Fig 3:- Total Liabilities / Total Assets Ratio for Oil and Gas Fig 4:- Current Ratio for Oil and Gas Companies
Companies
III. RESULTS AND FINDINGS
Current ratio indicates the ability of any company to
The results presented in table (3) illustrates the financial
meet it short-term debt obligations. This ratio also works as
insurance to the company to handle any unexpected soundness of the companies listed in the oil and gas sector at
commitment they might encounter. Al-Najjar (2009) found a the Kuwait stock exchange. It can be seen that all companies
had a negative X-score during the study period except for IPG
statistically significant negative relation between bankruptcy
where it had a positive X-score during the period 2010-2012
and the current ratio. The average current ratio for the
but that risk of bankruptcy was eased in 2013 when the score
companies in that sector was 1.869 times. Although Ikarus had
went to negative territories. When it comes to the best
the highest ratio of 4.197 times, that average came as a result
of huge unexplainable ratio in the year 2013 of 16.999 times. performer among companies working in that sector, it can be
If omitting this year data from the calculation, then the seen that NPSC was the best performer followed by SHC.
NPSC had outperformed all its rivals in both the return on
average ratio for Ikarus would be 1.638 times. In 2017, NPSC
assets (ROA) and the current ratio categories. SHC came
had the highest current ratio among all companies working in
second most unlikely company to face bankruptcy in 2017
the sector with a ratio of 4.288 times followed by SHC with a
despite showing negative ROA ratio during the 2010-2016
ratio of 3.161. This would indicate that these two companies
are capable of handling any unexpected short-term obligations period.The reason for that is the low total liabilities to total
assets ratio and high current ratio.
they might encounter. On the other side, GPIC had a current
ratio of only 0.718 times which means that GPIC is vulnerable
to any unexpected short-term obligations.
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International Journal of Economics, Commerce and Management Research Studies
Volume 1, Issue 2, September - 2018
2010 2011 2012 2013 2014 2015 2016 2017
Constant -4.336 -4.336 -4.336 -4.336 -4.336 -4.336 -4.336 -4.336
X1 0.000 0.075 -0.066 -0.076 -0.053 -0.061 -0.082 -0.097
X2 4.451 4.733 4.472 4.321 4.173 3.930 3.973 3.823
IPG X3 0.004 0.004 0.004 0.004 0.004 0.004 0.004 0.004
On the flip side, it can be seen that Burgan had the lowest X- During the study period two companies (Ikarus in 2016
score in 2017 of -0.522 followed by IPG that had an X-score and CMS in 2017) filed for delisting from the Kuwait stock
of -0.606 compared to -2.273 for the sectors' average in the exchange market. By looking at figure 6, it can be seen that
year 2017. both companies had a negative X-score. Looking at the
average change in the X-score for the companies, figure 7,
shows that Ikarus and CMS had the highest mean change in
the X-score. This positive mean X-score change would
indicate that these companies were heading to financial
difficulties in the future and by getting delisted these
companies will be able to keep their financial data unrevealed
to the public and force the shareholders to trade their shares in
the gray market.
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International Journal of Economics, Commerce and Management Research Studies
Volume 1, Issue 2, September - 2018
REFERENCES
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International Journal of Economics, Commerce and Management Research Studies
Volume 1, Issue 2, September - 2018
[15]. Shumway, T. (2001)Forecasting bankruptcy more
accurately: a simple hazard model,The Journal of
Business, 74, 101-124.
[16]. Sormunen, N and Laitinen T. (2012) Late Financial
Distress Process Stages and Financial Ratios: Evidence
for Auditors' Goingconcern
Evaluation,LiiketaloudellinenAikakauskirja (Academic
Journal), No. 1, 41-69.
[17]. Zmijewski, M. E. (1984) Methodological issues related to
the estimation of financial distress prediction
models,Journal of Accounting Research, 22, 59-82.
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