Assessing the Validity of the Altman’s Z-score Models as Predictors of Financial Distress in Companies Listed on the Nairobi Securities Exchange, Kenya (A Case Study)Download PDF
Corporate failures, insolvency and financial distresses are common phenomena across the world. Mega and small companies are closing down or experiencing operational challenges in both the developing and developed economies. Owing to the desire to estimate these events and avoid or timely remedy their possible negative consequences, several models have been developed to predict the likelihood of corporate failures. One such model is the Altman’s Z-score, which falls into three versions. This paper sought to evaluate the accuracy of these models in predicting failures of companies listed on the Nairobi Securities Exchange. Two once mega companies, Mumias Sugar Company and Kenya Airways Limited, and which are currently operating in losses were selected. The data were obtained from their annual reports for the three year period (2010-2012) before they began recording losses, and quantitative methods used to analyze them. The results indicated that, indeed, the two companies’ financial performance trend was entering the distress zone. The Z-score values for the Mumias Sugar Company were 3.61, 2.29, and 1.81 in 2010, 2011 and 2012 respectively, while those of the Kenya Airways were 1.13, 1.63 and 0.82 over the same periods. This paper recommends further studies to be conducted with a focus on other sectors and with a control group included.
Keywords: Altman’s Z-score models, Financial distress, Bankruptcy, Corporate failures, Nairobi Securities Exchange, Financial r