Computation and Comparison of Altman’s Z score of Zomato

Financial Risk Management

Christ (Deemed to be University)
5 BBA FIB B
Prof. Arjun B S
September 12th, 2022

Submitted by
Deepanshi Singh
2023656
5 BBA FIB B
 Introduction

About the company

Zomato is an Indian multinational food delivery and restaurant aggregator founded by Deepinder
Goyal and Pankaj Chaddah in 2008. Zomato provides restaurant information, menus and user
reviews as well as options to choose to have food delivered from partner restaurants in certain
cities. Users pay a delivery cost, but Zomato also receives a commission from restaurants for
each delivery divided between the delivery partner and the business. Restaurant commissions
differ depending on whether Zomato handles the delivery or if the restaurant utilises its own
riders.
It is one of the most complete and user-friendly apps where customers can look for nearby
eateries, place online orders, and quickly have food delivered to their home. As it offers menus,
reviews, and ratings, you can also find factual information about restaurants on this website.
Users may use such information to place orders and enjoy delectable cuisine at home.

Industry

Online food delivery makes it easier for people to place orders and have their favourite foods
delivered right to their home. It entails using the website or app to browse, choosing from a large
range of accessible cuisines, and paying using several various methods. The user is informed via
the website/application of the anticipated time for meal preparation and delivery. These
characteristics, together with delivery characteristics like simplicity, speed, and accuracy, are
driving up demand for these services in India. The market for online food delivery in India is
anticipated to grow at a CAGR of 28.9% between 2022 and 2027. regularly following and
assessing the direct as well as the indirect impact of the pandemic while keeping in mind the
COVID-19 uncertainties. A busy work schedule and high-income levels of professionals who
seldom have time to make their meals at home are the key factors driving the Indian food
delivery industry. Competitors in the industry include Swiggy, Food Panda, Uber Eats, etc.

Rationale behind selection

The reason why Zomato was chosen for this CIA is that the company has been facing losses in
the food delivery business. The company narrowed the consolidated loss to ₹185.7 crores in the
quarter ending June 30, 2022, as compared to a loss of ₹356.2 crores in the same quarter last
year. The company had posted a loss of ₹359.7 crores in the preceding quarter. These losses
were attributable to the owners of the company.

Altman Z score Model

Edward I. Altman published a Z score formula called the Altman Z score in the year 1968.
It is used to estimate the likelihood of bankruptcy of a business. It analyses a company's solvency
and liquidity condition using a variety of financial parameters. No business ever goes out of
business quickly. At least two years in advance, it begins to exhibit indications. Such
problematic enterprises can be identified by the Altman Z-Score model two years in advance.
Imagine knowing beforehand about the financial instability of corporations like Kingfisher
Airlines, DHFL, Bhushan, Essar, Alok Industries, etc. They could have stopped billions of worth
losses.
A score below 1.8 signals the company is likely headed for bankruptcy, while companies with
scores above 3 are not likely to go bankrupt.
 Formula

The formula of Altman’s z score is :

Z = 1.2 X1 + 1.4 X2 + 3.3 X3 + 0.6 X4 + 1.0 X5

X1 = working capital / total assets (measure of liquidity)

X2 = retained earnings/ total assets (indicates leverage)
X3 = EBIT (measures productivity)
X4 = market value of equity / total liabilities (captures the effect of decline in market value)
X5 = Sales / total assets, which is a measure of asset efficiency

Computation of Altman’s Z score for Zomato

 Interpretation

An Altman z score below 1.88 shows that the company is headed towards bankruptcy, whereas if
it is over 3, the company is not likely to go bankrupt. In the case of Zomato, the score is 2.188.
This means that it lies in the grey area between 1.88 and 3. If the company continues in the
same direction, in a few years' time, it will most definitely be heading towards bankruptcy.
The company experienced various challenges, including cut-throat industrial competition and
tight liquidity in the execution of the projects. Although, it did take necessary actions and
rigorous steps to overcome these challenges.

Ratio Analysis of Zomato

1. Earnings per share(EPS) - The earnings per share (EPS) ratio calculates the portion of a
company's net income that would theoretically be available for distribution to its common
stockholders. As per March 2022, the EPS of Zomato was -1.44. The EPS is negative
which means that dividends were not paid out by the company and the investors are
gloing in loss. Therefore, it would be risky to invest in Zomato.

2. Return on Equity(ROE) - It is a measure of the profitability of the business in relation to

the equity. It can also be co sidered as return on net assets. A good ROE is generally
considered between 15-20% whereas, as of March 2022, Zomato’s ROE was -9.53%.
This indicates that there was negative net income for the year and the shareholders were
losing their investments in the company.

3. Current Ratio - It is a liquidity ratio that measures the company’s ability to meet its
short-term obligations within the given period. It provides information on how the
company can maximize its assets to satisfy the current debts on its balance sheet. A good
current ratio lies anywhere between 1.2 to 2. As of March 2022, the current ratio of
Zomato was 11.06. This is very high, and although it indicates that the company can pay
off its debts, after a point, it means that the company is not efficiently utilizing its current
assets, and it may be overcapitalised.

4. Cash Profit Margin ratio - It is calculated by multiplying profit after tax with depreciation
and basically measures the business’s cash from its operating activities as a percentage of
the sales revenue. A good cash profit margin ratio is around 60%, whereas, as of March
 2022, the cash profit margin ratio of Zomato was -26%. Since it is negative, it means that
Zomato has been in a bad position to drive substantial earnings from the sales.

Suggestions and Conclusion

Zomato’s Altman z score can be improved by-

● Increasing the profitability and cash profit margin ratio
● Decreasing its liabilities
● Ensuring maximum utilisation of the assets and reducing current ratio
● Increasing return on equity (ROE)
By doing this, the business will seem healthier to investors as well.

The above can be achieved by undertaking the following steps -

● Regular analysis of the financial statements of Zomato by experienced industry
professionals
● Liabilities can be reduced by taking a calculated number of contacts after analyzing their
risks
● Ignoring regulations and improper documentation must be avoided to decrease liabilities
● A hike in prices charged by Zomato can increase the cash profit margin ratio, thereby
increasing the profitability of the business.

Nevertheless, Zomato's food delivery business has been rebounding well since the pandemic-
induced slump last year, as stated by Akshant Goyal, the company's chief financial officer,
during the announcement of the company's initial public offering (IPO).

References

● Zomato Profit and Loss Reports. (n.d.). Retrieved from The Economic Times website:

https://economictimes.indiatimes.com/zomato-ltd/profitandlose/companyid-57948.cms
● Jaiswar, P. S. (2022, August 1). Zomato Q1 results: Consolidated loss narrows to ₹186

cr, revenue rises. Retrieved September 12, 2022, from mint website:

https://www.livemint.com/companies/company-results/zomato-q1-results-consolidated-

loss-narrows-to-rs-186-cr-revenue-rises-over-67-11659350906203.html

● Zomato’s road to recovery. (n.d.). Retrieved from The Economic Times website:

https://economictimes.indiatimes.com/tech/newsletters/morning-dispatch/zomatos-road-

to-recovery/articleshow/84254970.cms?from=mdr

● [LIVE] Zomato Share Price | 52 Week High/Low Stocks | Stock History, Futures &

Options Quote. (2020). Retrieved September 12, 2022, from Nirmal Bang website:

https://www.nirmalbang.com/financial-ratios/zomato/252306

● Fernando, J. (2022, July 11). Current Ratio. Retrieved from Investopedia website:

https://www.investopedia.com/terms/c/currentratio.asp

● MANI. (2022, July 30). Altman Z-Score Model - Interpret and Find Potential Bankrupt

Companies. Retrieved September 12, 2022, from GETMONEYRICH website:

https://getmoneyrich.com/altman-z-score-model/