Altmans Z-score model for distress analysis:

In the year 1968 Edward I. Altman developed a multivariate model to predict the distress of a company. With the help of this model it is possible to predict whether any company has any chance to become bankrupt in near future. Altmans sample consisted of 33 failed and 33 non failed firms of which the failed firms were announced legally bankrupt. He has considered 22 financial and non-financial variables in different combination to predict the future bankruptcy. Out of the 22 ratios only 5 ratios could give the best result to measure corporate sickness. Altman used these 5 ratios to develop his Z-score model. The Model is as follows: Z = 0.012X1 + 0.014X2 + 0.033X3 + 0.006X4 + .999X5 Where, X1 = Working Capital / Total Assets X2 = Retained Earnings / Total Assets X3 = Earnings before Interest & Tax/ Total Assets X4 = Market value of equity / Book value of Total Debt X5 = Sales / Total Assets

Interpretation of the Result:

If the Z-score comes more than 2.99 then the company has no chance of bankruptcy in near future thus belongs to Non Bankrupt Class. If it comes out to be less than 1.81 then the company will belong to Bankrupt Class & the companies whose scores come between 2.99 and 1.81 will belong to Grey area as more investigation is required to determine the solvency position of these firms. They can be either Bankrupt or Non Bankrupt. On testing the predictive ability of this model he observed that prediction on bankruptcy can be made with 95% of success if it is predicted 1 year before the bankruptcy. But the success rate declines noticeably to 72% in the second year, 48% in the third year, 26% in the fourth year and 19% in the fifth year earlier to bankruptcy. Thus one of the major limitations of this model is that, it fails to differentiate between a bankrupt and a non-bankrupt company if the prediction of bankruptcy is made before a time period which has exceeded two years. Lets analyze the solvency status of Reliance Communications and the data required to analyze this are in the next page and the source for the data is moneycontrol.com.

Reliance Communications: Capital Structure:

Period From 2010 2009 2008 2007 2006 To 2011 2010 2009 2008 2007 Authorized Authorized Issued Capital Capital Capital (Rs. cr) (Rs. cr) (Rs. cr) Equity Share Equity Share Equity Share Equity Share Equity Share 1500 1500 1500 1500 1500 1032.01 1032.01 1032.01 1032.01 1022.31 Paid-up Capital Shares (nos) Face Value 2064026881 5 2064026881 5 2064026881 5 2064026881 5 2044614990 5 Capital 1032.01 1032.01 1032.01 1032.01 1022.31

Reliance Communication:
Profit & Loss account Rs. Cr. Mar '11 12 mths Income Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income Expenditure Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalised

12,129.77 0 12,129.77 484.25 0 12,614.02 64.92 159.79 608.07 9,102.95 0 1,772.15 0

Total Expenses

11,707.88 Mar '11 12 mths

Operating Profit PBDIT Interest PBDT Depreciation Other Written Off Profit Before Tax Extra-ordinary items PBT (Post Extra-ord Items) Tax Reported Net Profit Total Value Addition Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised) Shares in issue (lakhs) Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs)

421.89 906.14 178.11 728.03 2,855.62 0 -2,127.59 1,369.60 -757.99 0 -757.99 11,642.96 0 103.2 17.14 20,640.27 -3.67 10 233.26

Reliance Communication:
Balance Sheet Rs. Cr. Mar '11 12 mths Sources Of Funds Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves

1,032.01 1,032.01 0 0 47,112.47 0

Networth Secured Loans Unsecured Loans Total Debt Total Liabilities

48,144.48 15,226.02 16,226.72 31,452.74 79,597.22 Mar '11 12 mths

Application Of Funds Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deffered Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets Miscellaneous Expenses Total Assets Contingent Liabilities Book Value (Rs)

40,904.17 12,063.27 28,840.90 9,907.66 32,102.13 306.11 1,969.25 3,813.21 6,088.57 13,065.25 0 19,153.82 0 7,551.94 2,855.35 10,407.29 8,746.53 0 79,597.22 1,958.61 233.26

Lets calculate the values of X1, X2, X3, X4, & X5. X1 = Working Capital / Total Assets = (Current assets- current liabilities) / Total assets = 8746.53/79597.22 = 0.110*100 = 11% X2 = Retained Earnings / Total Assets = 47112.47 / 79597.22 = 0.592*100 = 59.2% X3 = Earnings before Interest & Tax/ Total Assets = (PBDIT- Depreciation)/ Total Assets = (906.14- 2,855.62)/79597.22
= ( -0.025)*100

= -2.5% X4 = Market value of equity / Book value of Total Debt = (Total no. of shares * Market value of each shares) / Book value of Total Debt = 13963.142/ 31,452.74 = 0.444*100 = 44.4% X5 = Sales / Total Assets = 12,129.77/ 79597.22 = 0.152 times

Z = 0.012X1 + 0.014X2 + 0.033X3 + 0.006X4 + .999X5 = 0.012*11 + 0.014*59.2 + 0.033*-(2.5) + 0.006*44.4 + 0.999*0.152 = 0.132 + 0.8288 0.0825 + 0.2664 + .152 = 1.2967 As the Z-score of Reliance Communication is 1.2967 which is much lower than 1.81, it has a high chance of bankruptcy in near future.