Applying Altman’s Business Failure Prediction Model To Indian NSE Small Cap And Mid Cap Auto And Auto Ancillary Companies
Journal Title: International Journal for Research in Applied Science and Engineering Technology (IJRASET) - Year 2015, Vol 3, Issue 11
Abstract
It has long been established that a detailed ratios analysis has good potential to determine and establish the financial performance of an organization by evaluating its operational and financial efficiencies. Altman’s business failure prediction model is based on a Z score that takes into account certain identified key ratios proven to have predictive power up to 3 years before the occurrence of failure/bankruptcy. Several studies have been conducted throughout the world propounding various failure prediction models. Despite all these attempts, the international research community is yet to reach an unambiguous conclusion. This paper seeks to apply Altman’s Z score model to predict the propensity for business failure of Indian small cap (3 in number) and mid cap (7 in number) auto companies (in all, 10 companies) listed on the CNX Small Cap and CNX Mid Cap indices and attempts to evaluate the predictive power and strength of the Altman’s Z score model within the Indian context in terms of its ability to predict financial failure of these companies for the period 2000-01 to 2011-12 (12 years). The current study reveals that the Altman’s Z score model failed in its accuracy and strength to be able to accurately classify these companies as successful or failed, highlighting its limited usefulness and in its application to the small cap and mid cap segments of the Indian auto industry vis-à-vis the definition of failure used in this research. This clearly demonstrates that further studies are required to develop an empirical model that best suits and is more applicable to the small cap and mid cap industries within the Indian ecosystem.
Authors and Affiliations
G C Vijayakumar, G Rajendra
Keywords
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