Altman Z score and RBI Kamath committee ratios.

 Edward Altman published the Z score formula for predicting bankruptcy way back in 1968. He said this formula can be judiciously used to find whether any company may go into bankruptcy within the next two years. It is a quick find formula to gauge the financial health for publicly held companies by using the P&L values and Balance sheet values through a mix of business ratios.

In simple terms Z =1.2X1+1.4X2+3.3X3+0.6X4+1.0X5, where

X1= Working capital/Total assets.i.e the ratio of liquid assets in relation to the total assets or size of the Co.

X2=Retained earnings/Total assets i.e the ratio of retained profit in relation to the total assets of the Co.

X3=EBIT/Total Assets i.e the ratio of efficiency of the operations without the impact of leveraging, in relation to the assets deployed in the Co.also signifying the importance of operating earnings for the long term financial health of the Co.

X4=market capitalisation/book value of total liabilities i.e the ratio of market price in relation to the total liabilities incl. borrowings are  considered as a reflection financial health;

X5= Total sales/ Total assets i.e the ratio of assets turnover indicating how well the assets are utilised to generate the sales.

There are some variations for privately held companies and for service cos.

What is the necessity for delving into this formula of bankruptcy now? RBI appointed KV Kamath Committee has come out with similar ratios for the use of banks in identifying distress among the Indian business companies with various ratio values depending on the kind of business the cos concerned are in.

The Committee came out with the following ratios, that were selected based on their relevance for Resolution Plan for the distressed cos. when their loans are put to restructuring by the banks. 

1)Total outside liabilities(TOL)/Adjusted Tangible Networth(ATNW)i.e Adjusted Net of investments;

2)Total Debt/EBIDTA ;

3)Current Ratio;

4)Debt Service Coverage Ratio (DSCR);i.e the ratio of the addition of the net cash accruals with interest and finance charges divided by the addition of the current portion of the long-term debt with interest and finance charges.

5) Average Debt Service Coverage Ratio (ADSCR) i.e average over the loan period.

All these ratios are highly relevant with a well-defined threshold for various industries of the domestic economy including that of services, for those looking at the financial health of the Companies. Many Credit Rating Agencies also use many of these ratios. Perhaps, the Altman Z score may also be included for evaluating the preponderance to bankruptcy among the Co.s  under the distressed category seeking their bank loans to be restructured.

Indian politicians -their precept and practice

 It is said "there is a world of difference between precept and practice"- more so with our politicians and the gap widens when they speak about it more.!!

It is generally thought that Political lies are always for exploiting the ignorance of the public. Mostly they are manipulative for winning the elections. But there are times like Obama lies about Health care inorder to push through some legislation to benefit the larger society(link).

However coming to India, Politicians throw promises at the people mainly to win elections and then they renege on the promises made.

In the recent few weeks there are lot of accusations by the Opposition parties against the Central Govt that Question Hour in the ensuing Parliament has been abolished muzzling the freedom of MPs to ask Govt questions about peoples' problems to elicit answers from the Govt. But there are two stark statistics contradicting the so-called champions of freedom of expression in the Opposition. In the last few years Question hour in the parliament has been wasted for 60% of the time by the unruly Oppositions marring the proceedings of the house. Another interesting point is that in the Opposition ruled West Bengal Question Hour has been suspended by the Govt in view of the prevailing pandemic.!!

So this is clearly double standards adopted by the Opposition and it is raised against the Central Govt only to embarrass it and score some brownie points in the media.

Many of the Opposition ruled State Govts prune the budget of the local bodies saying that the State level finances are severely constrained. But if the Central Govt does it, all of them raise their voices against the Centre saying that the Central-State relationship is severely undermined and the trust of cooperative federalism has been betrayed by the Centre. They have no such qualms when they repress the local bodies by not releasing the funds to them. These are the doublespeak adopted by the opposition parties as a matter of right and pride.Our society does not relish this behaviour of politicians which they do not understand.

Centre and States are like two important organs of the body which is India. Both must work in tandem and in coordinated rhythm. Brain cannot let the Heart down and Heart cannot afford to stop blood supply to Brain. They cannot be at loggerheads with each other. This is the fundamental concept which Politicians must keep in their minds while performing and discharging their Constitutional duties.