Financial health analysis using altman's Z score-A comparative study of select steel companies

The financial health plays a significant role in the successful functioning of a firm. Stockholders, Managers, Creditors and employees of the business are always concerned about financial health of the companies. Poor financial health threatens the very survival of the firm and leads to business failures. Measuring the financial health of a company is extremely important for both managers as well as investors. Several tools have been developed to diagnose the financial strength of a company based on the Financial Statements. Ratio Analysis, and Decision Theory etc., but they indicate the present results not the future. Edward I. Altman's Z score model which employs a combination of various ratios to form an index of liquidity, profitability, sustainability and feasibility, has been highly accurate in analyzing the financial health of a company at present state and as well as to enable one to predict the future also, particularly in terms of probability of bankruptcy. It is an important tool that predicts the financial health of companies and categorizes them in three zones-‘safe’, ‘grey’ and ‘distress’. In Recent time, Steel industries have been showing good performance and producing large amount of steel. This paper attempts to investigate the financial health of select steel companies in India with special reference to Tata Steel Ltd., and Steel Authority of India Limited. It can be concluded from the study that both the companies are in distress zone.