Relationship between the Altman Z-Score model and the Z-Score financial indicators

Abstract

From a theoretical point of view, there is no general consensus on the identification of the financial difficulties of a company. The Altman Z-Score model is recognized in the literature as an indicator for measuring the probability of financial insolvency. While this model is widely used as a metric for predicting financial distress, there is no agreement on the factors that determine the behavior or outcome of the Z-Score. In this sense, the purpose of this study is to analyze the factors that determine the behavior of the Z-Score in Colombian companies. The research is developed under a quantitative methodological approach, with a correlational design. This research scope seeks to measure the association between the Altman Z-Score and the financial indicators that determine its outcome; for this purpose, it is analyzed a total of 2,684 companies of the Colombian commercial sector that reported financial information on a systematic basis during the period 2016-2020. The results of the statistical tests carried out reveal that there is a direct relationship between the indicator that measures the financial structure (equity/liabilities) and the Altman Z-Score. This leads to the conclusion that, from the point of view of Altman’s model, a company that seeks to capitalize profits and keep debt levels under control will be a company with financial stability and a low probability of financial insolvency.