Group assignment № 3

By
Anum Ikram
Ziroat Tosheva

Case:
Financial distress – Altman Z' and Ohlson O default ratios. Please compute the Altman Z and
Ohlson O scores for the original and the modified company!
Answers:
The renewed strategy at the beginning of the year in our case including:
Reduced expenditures
Changing locomotive to new cheaper locomotive ( 2.8m Euro)
Less fuel cost (Saved this amount 1,673,899,991)
Firing employees (923,300)
Get the financial profit of 12,868,387
Let’s analyze financial distress of the company. What the Financial distress is? According to
Altman – Z’ and Ohlson’ estimations, we can say that it is a condition in which an organization
or any individual is not capable enough to honor its financial obligations as a result of
insufficient revenue conditions.
The method of this module for private companies:
Z= 0,717*A + 0,847*B + 3,107*C + 0,420*D +0,998*E1
Where are:
Zones of discrimination
A = (current assets - current liabilities) / total
Z′ > 2.9 – “Safe” Zone
assets 1.23 < Z′ < 2.9 – “Grey” Zone
B = retained earnings / total assets Z′ < 1.23 – “Distress” Zone
C = earnings before interest and taxes / total assets
D = book value of equity / total liabilities
E = sales / total assets
Here if we take into account Ohlson-O (1980) model:
O=-1,32-0,407*log(TA/GNP)+6,03*TL/TA-1,43*WC/TA+0,0757*CL/CA-1,72*X-
2,37*NI/TA-1,83*FFO/TL+0,285*Y-0,521*(NIt-NIt-1)/(abs(NIt)-abs(NIt-1))
Where are
TA = total assets
 GNP =
TL = total liabilities
WC = working capital
CL = current liabilities
CA = current assets
X = 1 if TL > TA, 0 otherwise
NI = net income
FFO = funds from operations
Y = 1 if a net loss for the last two years, 0 otherwise

In our case: Financial distress level as Altman-Z Ratio is 1.95 in grey zone, original was 0,23
in red zone in high financial distress and Ohlson-O was p=0.99, representing the unprofitability
of this company, after new strategy it is equal to 0,63.

2.50

2.00 1.93
1.78

1.50

1.00
0.99 0.98

0.83 0.63
0.50
0.23 0.24

0.00
2020 2021

Ohlson-O Before Altman-Z Before Ohlson-O ratio Altman-Z ratio

Based on new strategy, the company makes 1,095,058,937 HUF in each year approximately, and
there’s been a decreases in financial distress level of the company as well. From red zone to grey
zone.