Financial Distress Analysis - An Exploratory Study Using Financial Models

Abstract

Financial distress is a generic term, which denotes deteriorating or debilitating financial condition of an entity. Terms such as "industrial sickness", "corporate failures" and "insolvency" are also used to convey almost similar, though not identical idea. Financial distress is defined as a condition where a company cannot meet or has difficulty paying off its financial obligations to its creditors and debt holders. The chance of financial distress increases when a firm has high fixed costs, illiquid assets, or revenues that are sensitive to economic downturns and reduce return on investment. To be able to predict whether the business will be able to meet its financial future obligations has led to many research works. The present paper analyses the probability of bankruptcy of Hindustan Organic Chemicals Ltd at Ambalamugal, Cochin using financial models such as Altman z-score model and Flamur model. From the analysis it was found that the company in its initial period of study (2008-2012) shows financial health. However, from the period (2013-2014) it has shown signs of bankruptcy. The study recommends increase in working capital base from long term fund for the effective use of fixed assets. The study also suggests conducting further research on firms with lesser turnover using other financial models.