Bankruptcy Analysis Using Altman Z-score Model in Retail Trading Company Listed in Indonesia Stock Exchange * Ramadona Simbolon and Sri Elviani Department of Accounting, Faculty of Economics, Islamic University North Sumatra, Indonesia; * Corresponding author: dona_bolon2007@yahoo.co.id Abstract The purpose of this study was to bankruptcy prediction in trading retail companies listed in Indonesian Stock Exchange. The population of this study is a retail company listed on the Indonesia Stock Exchange, which amounted to 22 companies. The research samples were 19 companies, selected using purposive sampling method. This study uses secondary data that collected from Indonesian Stock Exchange website in the form of audited financial statements for years 2015 and 2016. We used Altman Z Score for data analysis. This study find that 3 firms in 2016 and 2015 are always on the bankruptcy classification with z score of less than 1.8, so the findings of this study can be useful for managers and shareholders in financial decision-making to take steps financial and business strategic and for governments to work out solutions to prevent bankruptcy by boosting economic growth and suppressing inflation rates to increase public purchasing power. This study also find 8 firms are always in a non-bankrupt or healthy classification with an Altman score of z score greater than 2.9, so, these findings can be useful for managers and shareholders to make financial decisions, by looking for investment options to make available funds can be utilized and not just focus on retail companies only. Keywords: bankruptcy prediction, Altman s Z-score, retail company. Introduction For more than 70 years, business failure has been one of the most discussed topics in the financial literature (Balcaen and Ooghe, 2006). Business failure matters a lot for many stakeholders: customers, suppliers, creditors and, of course, the firm s workers (Daubie and Meskens, 2001). Bankruptcy leads, on the one hand, to catastrophic macroeconomic consequences for the overall societal well-being and, on the other hand, to disastrous microeconomic consequences for the different partners of the affected firms, which explains the academic appeal of this topic (Charest et al., 1990). By the end of the third quarter of 2008, the world economy was faced with a new round of global economic stability, as the financial crisis widened to various countries (BI, 2009). Global financial crisis began in August 2007, when one of the largest banks France BNP Paribas announced the freezing of several securities related to the US high-risk housing mortgage (Subprime Mortgage).The freeze then began to trigger turmoil in financial markets and eventually spread throughout the world. At the end of the third quarter of 2008, the intensity of the crisis grew with 273
Ramadona Simbolon and Sri Elviani the collapse of the largest US investment bank Lehman Brothers, which was followed by increasingly severe financial difficulties in a number of large-scale financial institutions in the United States, Europe and Japan. The global financial crisis has affected the Indonesian economy as reflected by the turmoil in the Capital Market and Money Market (BI, 2009). In Indonesia, the number of companies delisting from 2009 to 2017 is 31 companies (idx, 2017). Some companies are delisted because they have no sustainability or bankruptcy. The bankruptcy of this company will eventually culminate in the wave of Termination of Labor Relations (BI, 2009). Based on data from the Ministry of Manpower and Transmigration, Termination of Employment (PHK) from 2015 to 2016 reached 61,620 people (Kemnaker, 2016). The subsequent wave of employment termination will have an impact on the declining contribution of labor in national income (BI, 2009). This condition will in turn have implications for the decline in public consumption in aggregate (BI, 2009). For measuring the financial health of a business firm, there are lots of techniques available. But the Altman s Z-score has been proven to be a reliable tool across the globe. This model devotes to predict possibilities of bankruptcy of manufacturing concerns. There is evidence that it has 76.9% accuracy in predicting the bankruptcy of the underlying sample (Begley et al. 1996). Altman (1968) defines five predicted factors that can be used to test the validity of Multivariate model. The model is based on financial ratios. Using financial ratios to predict bankruptcy can be accurate up to 90% (Chen & Shemerda, 1981). Hence, this research aims to bankruptcy prediction using Altman z-score model in retail trading company in Indonesian. This study has some contributions. First, for the development of science in the field of financial analysis and financial management as it provides empirical evidence of the effectiveness of Altman Z-Score model to bankruptcy prediction that occurred in retail company in Indonesian. Second, it has a contribution to an policy maker in Indonesian since the study results provides any information that may provide a signal on the areas that have a high potential for bankruptcy so that the policy maker would be take steps financial and business strategic. Third, it contributes to policy makers in Indonesia in growing the economy and purchasing power of the people. Literature Review Sanesh (2016) tried to assess the Altman Z-score of NIFTY 50 companies excluding banks and financial companies. The score tries to predict probability of default by the companies due to the financial distress based on the current financial statistics of the company. Kumari s (2013) paper tried to predict bankruptcy for MMTC based on Altman s model of the Z score. She concluded that the overall financial health of MMTC is good, and it can be quoted as an investor friendly company. Ramana Reddy and Hari Prasad Reddy (2013) are also relevant. In this article, the Z score analysis shows the poor financial performance leading to bankruptcy of Chittoor co-operative sugars Ltd. Comparatively the financial performance of Sri Venkateswara Sugars Factory Ltd. was good. Mohammed (2016) study has been conducted to assess the financial health of a firm namely Raysut Cement Company SAOG and its subsidiaries in Oman. The study revealed that that the financial position of the subject company is good. It never fell to less than 1.8 according to the Z score analysis it has a small probability of the firm facing financial distress in the near future. The study too revealed the Company Raysut Cement Company SAOG and its subsidiaries are financially sound as they have higher Z score than the benchmark (2.99) except in some years of study. 274
Mizan and Hossain s (2014) study has been conducted to assess the financial health of cement industry of Bangladesh. The study revealed that among the five firms, two firms are financially sound as they have higher Z score than the benchmark (2.99). Another firm is in the grey area that is the firm is financially sound, but the management requires special attention to improve the financial health of the organization. The other two firms are at serious risk of financial crisis. Mizan, Amin, and Rahman (2011) conducted a study for the prediction of bankruptcy of the pharmaceutical industry in Bangladesh. They used the Altman Z score Model for this purpose where sample size was six leading companies of this industry. Their study reveals some valuable findings like, two firms are found financially sound having no bankruptcy possibility in the near future and other companies are found to be unsatisfactory and they have a significant likelihood of facing financial crisis in the near future. Research Method The population of this study is a retail company listed on the Indonesia Stock Exchange, which amounted to 22 companies. The research samples were selected using purposive sampling method based on three (3) criteria: the companies audited by the Public Accounting Firm for the period 2015 and 2016. (2) The types audited by the Public Accounting Firm are the audited financial statements of 2015 and 2016. (3) The company is not delisted during the period 2015 and 2016. According to these criteria, the company that became sample of this research is 19 companies. This case study was based on the secondary data in the form Annual report for the period of 2 years (2015 to 2016) obtained from Indonesian Stock Exchange website and companies website. The collected data was analyzed with Altman Z-Score model. This value is to represent overall index of corporate financial health. Zi=1.2 x1i + 1.4 x2i + 3.3 x3i + 0.6 x4i + 1 x5i where i = year 1 to n x1i = Networking capital to total assets ratio x2i = Retained Earnings to total assets ratio x3i = Profit Before interest & Tax (PBIT) to total assets ratio x4i = Capital funds to total liabilities ratio x5i = net sales to total assets ratio Results and Discussion Data of financial statement collected from 19 sample retail trading company that listing in Indonesia Stock Exchange on the form Consolidated statements of financial position, Consolidated statements of comprehensive income, Consolidated statements of changes in equity, Consolidated statements of cash flows, and Notes to the consolidated financial statements for year 2015 and 2016. The following are the results of the analysis with using Altman Z Score model, as shown on the Table 1, Table 2 and Table 3. Based the calculation of Altman Z Score for 2015, on the Table 1, shows some companies are in the classification of bankruptcy, gray classification, and the classification is not bankrupt or healthy. In 2015, there are 6 companies in the bankrupt classification, namely PT CSAP, PT DAYA, PT KOIN, PT MIDI, PT RIMO and PT SKYB. There are 2 companies in the gray classification, namely PT HERO and PT RALS. The classification is not bankrupt or healthy there are 11 companies, namely PT ACES, PT AMRT, PT CENT, PT ECII, PT ERAA, PT GOLD, PT LPPF, PT MKNT, PT MPPA, PT RANC and PT TELE. 275
Ramadona Simbolon and Sri Elviani Table 1. Showing Altman Z Score in 2015. Company Code X1 X2 X3 X4 X5 Z Score ACES 0.7546 0.9178 0.7764 0.4570 1.4514 4.3574 AMRT 0.0564 0.2051 0.2484 0.1522 3.1762 3.8384 CENT 0.2916-0.1106 0.0930 3.2832 0.0812 3.6384 CSAP 0.0712 0.1673 0.0491 0.0972 0.2021 0.5870 DAYA 0.0020-1.2665-0.8012 1.9552 1.5151 1.4045 ECII 0.7729 0.3305 0.0696 5.5735 0.9379 7.6845 ERAA 0.1640 0.22568 0.20196 0.2544 2.5650 3.4110 GOLD 0.8712 0.4078 0 1.7733 0 3.0523 HERO 0.0823 0.3512-0.0502 0.6792 1.7845 2.8471 KOIN 0.1528 0.0392-0.0099 0.1036 0.5246 0.8104 LPPF -0.0512 1.5447 1.9047-0.6866 2.3158 5.0274 MIDI -0.1478 0.1698 0.0115 0.0674 0.0435 0.1444 MKNT 1.0346 0.0785 0.1461 6.3996 4.4527 12.1117 MPPA 0.1621 0.3413 0.1679 0.1779 2.2879 3.1372 RALS 0.4170 0.9318 0.1778 0.1395 1.1906 2.8568 RANC 0.1648 0.2146 0.1026 0.4987 2.6580 3.6388 RIMO -2.3538-9.0594-0.5811 0.7166 0.0037-11.274 SKYB 0.0612-1.2153-2.9344 0.4879 0-3.6005 TELE 0.8596 0.2261 0.3118 0.2314 3.0917 4.7208 Based the calculation of Altman Z Score for 2016 on the table 4.2, shows some companies are in the classification of bankruptcy, gray classification, and the classification is not bankrupt or healthy. In 2015, there are five (5) companies in the bankrupt classification, namely PT GOLD, PT KOIN, PT MIDI, PT MPPA and PT RIMO. There are three (3) companies in the gray classification, namely PT CENT, PT CSAP and PT DAYA. Classification is not bankrupt or healthy there are eleven (11) companies, namely PT ACES, PT AMRT, PT ECII, PT ERAA, PT HERO, PT LPPF, PT MKNT, PT RALS, PT RANC, PT SKYB and PT TELE. Based a comparison of Altman Z Score for 2016 and 2015, it shows three (3) companies that are always in bankruptcy classification in 2016 and 2015, namely PT KOIN, PT MIDI and PT RIMO. There is one company that classification Altman Z- Score changed from 2015 to 2016, bankrupt classification becomes not bankrupt or healthy namely PT SKYB. There are two companies from bankrupt classification to gray classification, i.e. PT CSAP and PT DAYA. There is one company from bankrupt classification to bankruptcy, namely PT GOLD, while the company that is always in the classification is not bankrupt in 2015 and 2016 there are eight (8) companies, namely PT ACES, PT AMRT, PT ECII, PT ERAA, PT LPPF, PT MKNT, PT RANC and PT TELE. 276
Table 2. Showing Altman Z Score in 2016. Company X1 X2 X3 X4 X5 Z Score Code ACES 0.7826 0.9634 0.7788 0.4228 1.3230 4.2707 AMRT -0.0732 0.1902 0.2154 0.1120 2.8810 3.3256 CENT 0.0596-0.1404 0.0508 2.5266 0.1070 2.6036 CSAP 0.1816 0.1593 0.0785 0.1971 1.8310 2.4476 DAYA 0.3256-0.9752-0.3903 1.9756 1.9756 2.1272 ECII 0.7201 0.3126-0.0590 5.0985 0.8821 6.9543 ERAA 0.1992 0.2777 0.2372 0.2893 2.7674 3.7709 GOLD -0.1492 0.1649 0.0165 0.0624 0.4722 0.5533 HERO 0.1356 0.4226 0.0811 0.9400 1.8270 3.4064 KOIN 0.1407 0.0154-0.0554 0.0997 0.5285 0.7289 LPPF 0.0951 1.4523 1.7199-0.6362 2.0369 4.6681 MIDI -0.1627 0.1649 0.0165 0.0624 0.4722 0.5533 MKNT 0.9566 0.0882 0.0712 3.0230 1.7162 5.8553 MPPA 0.1376 0.2895 0.0871 0.1465 1.0184 1.6792 RALS 0.4704 0.9782 0.2613 0.0414 1.2604 3.0117 RANC 0.2514 0.2975 0.2975 0.5745 2.8617 4.2128 RIMO -1.8044-7.1281-0.3069 0.6395 0.0013-8.5986 SKYB 0.1804-2.4753 3.6573 573948 0 573949.3 TELE 0.9092 0.2590 0.4075 0.2019 3.3243 5.1019 Table 3. Showing Comparison of Altman Z Scores in 2016 and 2015 Company Code Altman Z Score in 2016 Altman Z Score in 2015 ACES 4.2707 4.3574 AMRT 3.3256 3.8384 CENT 2.6036 3.6384 CSAP 2.4476 0.5870 DAYA 2.1272 1.4045 ECII 6.9543 7.6845 ERAA 3.7709 3.4110 GOLD 0.5533 3.0523 HERO 3.4064 2.8471 KOIN 0.7289 0.8104 LPPF 4.6681 5.0274 MIDI 0.5533 0.1444 MKNT 5.8553 12.1117 MPPA 1.6792 3.1372 RALS 3.0117 2.8568 RANC 4.2128 3.6388 RIMO -8.5986-11.274 SKYB 573949.3-3.6005 TELE 5.1019 4.7208 The results of analysis by using Altman Z-Score model found the existence of some companies that predicted will go bankrupt. The analysis found that the indicators that caused some companies' Altman Z-Score values to be below the standard were the working capital deficit and net loss earned by these companies, resulting in 277
Ramadona Simbolon and Sri Elviani deficit retained earnings. This is due to the declining selling rate while the workload tends to increase. The analysis also shows that some companies are still in the gray zone despite working capital deficits and suffering losses. this is due to an indicator of the stock market value is still stable, so that the equity market value is still able to cover. Some companies with their total assets are also still able to obtain a stable level of sales. The analysis also shows that some companies are in the safe zone. This is supported by surplus working capital indicators, surplus-held profits, sales are still able to cover operational expenses, so the company gets profit and its equity market value is stable and tends to increase from year to year. These results provide an overview to shareholders, especially those who are predicted to go bankrupt and are in a gray zone to take financial and business policies in terms of increased sales and working capital or merge with companies that have healthy financial and liquid capabilities without having to do termination of employment to existing employees. This analysis also provides an overview for policy makers in Indonesia, namely the Government of Indonesia to increase economic growth and people's purchasing power, so that the economy does not experience sluggishness. Conclusion The above results clearly show the financial position of retail companies listed on the Indonesia Stock Exchange varies. The financial position of the retail company is at the address of bankruptcy, gray and not bankrupt. The financial position of these companies in 2015 and 2016 there is a change from bankruptcy to not go bankrupt, from not going bankrupt da nada that does not change, that is always on the value of bankruptcy and not bankrupt. 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 the stakeholders. The current study has been conducted to assess the financial health of firms namely Retail Company which listing in Indonesian Stock Exchange. The study reveals that 3 firms in 2016 and 2015 are always on the bankruptcy classification with z score of less than 1.8, so the findings of this study can be useful for managers and shareholders in financial decision-making to seek financial resources by merging Business and for governments to work out solutions to prevent bankruptcy by boosting economic growth and suppressing inflation rates to increase public purchasing power. The findings of this study also reveal that 8 firms are always in a non-bankrupt or healthy classification with an Altman score of z score greater than 2.9, so, these findings can be useful for managers and shareholders to make financial decisions, by looking for investment options to make available funds can be utilized and not just focus on retail companies only. This study is a case study on a retail company listed on the Indonesia Stock Exchange. The company numbered 22 and 19 companies is sampled. This study covers a period of 2015-2016. The collected data for the present study is secondary data which is based on the published data of financial statements of the company. This study is based on case studies of similar business sectors, i.e. retail companies listed on the Indonesia Stock Exchange. Further studies can conduct similar research, and compared with different types of companies or compare them with 278
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