Financial distress analysis for the prediction of corporate bankruptcy – a case study of a public sector company in India

Abstract

Purpose: The present study examines the liquidity of the firm and its impact on financial distress, which may or may not increase the chances of bankruptcy. The study also analyzes the profitability, cash position, and solvency of the firm.Design/methodology/approach: We use the data of a listed Government manufacturing company and measure the financial distress and probabilities of bankruptcy to test the chances of financial distress during the period between 2015 and 2019. The financial models used for evaluation in the study are the Altman z-score model, Logit Probability model, and Falmur model.Findings: The study found that there was a chance of bankruptcy in the initial years, but later, it survived the bankruptcy. The study also established that the liquidity and solvency of the firm were not up to the standard.Practical implications: The result of the study extends our theoretical understanding and also provides valuable guidelines to reduce the chance of insolvency, bankruptcy, and financial distress of firms and to maintain the proper financial health of the firm.Originality/value: While many empirical studies investigate the relationship between liquidity position and its impact on financially distressed firms in the industry as a whole, but most do not consider the impact of financial distress in an individual firm or company. Most of the published studies use statistical tools for the evaluation of financial distress. This study uses Multiple Discriminant financial model analysis. Multiple Discriminant financial model Analyses are very useful in deciding remedial actions for financial distress problems.