Friday, 4 September 2020

Altman Z-Score: More Bankruptcies Soon?

The six-month loan moratorium is ending soon in September 2020. A surge in bankruptcy filings by companies and individuals is quite possible. Governments around the world are taking steps to save businesses battered by lockdowns. Collapse of demand, retrenchment of employees and financial sustainability of businesses are challenges faced by many companies. The risk of insolvency is real.

"Covid-19 is creating an insolvency time bomb," said Euler Hermes, an insurance firm providing insurance for trade deals, predicting a 35-per cent cumulative jump in the number of companies that could go bust between 2019 and 2021. According to Euler Hermes, this would be a record for its global insolvency index – and that about half of the countries worldwide would be setting new highs since the 2009 financial crisis.

The biggest increase will be in the United States, with a 57 per cent jump in insolvencies in 2021 compared to 2019, before the pandemic hit. In Brazil, bankruptcies are expected to soar by 45 per cent, in Britain by 43 per cent, and Spain by 41 per cent. China has forecasted a 20 per cent surge in bankruptcies.

To assess the financial health of companies listed on Bursa Malaysia, we have conducted an Altman Z-Score Analysis. The Z-score model was developed by New York University Professor Edward Altman in 1968 as a measure of the financial stability of companies. The result should be interpreted as the lower the score, the greater the risk of the company falling into financial distress.

Altman Z-Score
No. of Companies
(Dec 2019)
No. of Companies
(Mar 2020)
Change %
Safe Zone
Z ≥ 3.0
Grey Zone
1.8 < Z < 3.0
Distress Zone
Z ≤ 1.8


Companies without sufficient data were eliminated. Based on our analysis, out of 842 listed companies, 346 were under distress zone in late December 2019. The number then surged by 20% to 414 in March 2020. The distress zone suggests a considerable risk for companies likely to go into bankruptcy soon.

KPMG tested Z-score using 10,098 companies that were declared bankrupt since 2014. They found Altman Z-score as highly relevant to use for prediction of bankruptcies. A Z-score below 1.1 is in a high critical stage.

In March 2020, 243 companies listed on Bursa were below 1.1 score. In other words, 29% of stocks analysed were in the high critical stage! Companies in the safe zone and grey zone, on the other hand, dropped by 14% from December 2019 to March 2020. We will further investigate this once the June quarter results are available.

The key to this is how do banks and the Government intend react to a development that must happen surely!


1.     World facing bankruptcy time bomb, 21 July 2020, New Straits Times
2.     Covid-19 Financial outlook: How will Denmark’s business sectors cope? 28 May 2020, KPMG

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