There was 2 types Of z-score del, since Dutch Lady company was public manufacturing firm, so it use the original Z-score model which means that a z;score above 2. 99 shows the solvency. Thus, this company considered as safe zone and the bankruptcy of this company is unlikely to occur. The firm unlikely to default and the company’s credit risk is low. If a firm is non-manufacturing firm, it have to use modified z-score model. This type of model did not include the fifth ratio (XX: Sales/ Total assets).
It was because they have less total assets if compare with manufacturing firms and the value from sales to total assets ratio will have a greater change in a z-score. It was no fair for non-manufacturing firm using the original z-score. So, a z-score above 2. 6 was considered as safe zone. Decreasing in z-score from year 2012 to 2013 is because of the decreasing in first, second and fourth ratio have a greater impact on Z-score if compared with decreasing in third and fifth ratio. The first ratio shows the short-term financial health of a firm.
The higher the working capital than total assets, the teeter the liquidity of company. Dutch lady company with positive working capital for both year is rarely has problems to make payments since it has enough current assets to cover short-term obligations. Working Capital is used to analyze the assets required to run daily operations of a firm. If this ratio is high, it also means that the revenue generated from sales faster than the due date that need to make payments, the company can match its creditors on time.
As conclusion, working capital ratio shows the ability of a firm make sales on the amount of borrowing. However, too high amount of working capital is not a good thing. If a firm’s working capital over 2, it means that they hold too much inventories or not investing their excess assets to generate profit. The table above show that there was slightly decreased in the efficiency for current assets to settle the current liabilities. However, the group still remain the same ability which are 1 times to cover the short-term liabilities. This means the company able to cover the interest charged by bank.
Dutch lady able to continue operate its business without worry about he solvency problem. The second ratio shows the ability of a firm accumulate earnings from total assets. The main purpose of this ratio is to evaluate how much a firm finance its assets through debt. The higher the ratio, the higher the amount of capital financed through retained earnings rather than using debts. The table above shows there was slightly decrease in second ratio, it could means that the growth may achieved by increasing the debt. This will increase the credit risk if the group cannot meet its debt obligations.
The ann. will prefer to borrow the company which got high retained earnings per total assets ratio because it shows the firm able to overcome the bad year of losses. Since the retained earnings does not used to pay out as dividend, the firm may use it to pay debt or just save it as reserves. It was perfect when a company have this ratio Of 1:1. However, it unable to achieve in the real world. So, the closer the ratio to 1 00%, the better it is. The third ratio shows the true productivity of a firm to generate earnings from assets before interest and taxes deducted.
The higher the ratio, the better the earnings power of a firm. BIT also known as operating profit. Besides, it represent the cash in hand which available to make payment to their creditors. The table above shows that there was increasing in operating efficiency, it was a good sign for the group to increase the z-score. The reason of the third ratio has the most impact on the z-score (3. 3) is because of BIT as the major factor to measure the long-term viability of a company. In addition, the company which can earn profit able to survive in future.
Usually different company will have different structure of tax or interest rates, this will affect the real earning power of firm become not accurately. Thus, the third ratio which excluding interest and tax enable the result become more accurate. The fourth ratio shows how much the market value of a firm will decrease before the total liabilities more than the assets. This depends on the market capitalization which is the current share price multiply with the share issued. The higher the stock price, the higher the market confidence of a firm and lead to higher ratio.
The table above shows the share capital remain the same in both year, but the fourth ratio slightly decrease due to the total liability increases. This could means that decreasing in the expectations of investors toward this company’s future earnings power and got lower market confidence. The reason of fourth ratio has the lesser impact on z-score (0. 6) because it was the only forward-looking ratio in z-model. Usually there was many uncertainty in future, it does not have a fix market value of equity since it change time to time. So, the impact on z-score cannot be too much in the calculation.
The fifth ratio shows that how efficiently a firm generate sales from its assets. It can knows as assets turnover ratio. The higher the output produced from assets, the higher the ratio. Besides, high or increasing in this ratio could indicate that a firm was success to grow the market share in market. The table above shows the fifth ratio increasing, it means that the group’s management skills improved and has better control over their cost. They just use less portion of total assets to generate more sales in year 2013, so more efficiency and prod activity compared to year 2012.