Using altmans multivariate approach in business failure investigation (A case study of Uchumi supermarket ltd 2000-2005)
Abstract
Business failure represents a significant outcome of entrepreneurial activity and yet remains
an underdeveloped area of research. This study focuses on use of financial statements and
fundamental accounting ratios as vital information in establishing both state of management
and state of health of a business. Sometimes in the hindsight questions are raised as to
whether the accounting fonnat can reveal all to the readers and the financial analysts. This
study uses the USLs five year fmancial statements and ratios for the period June 2000 to
June 2005. The specific ratios are factored into the Altman's Multivariate Z-score Model to
investigate what may have caused the company's sudden business failure in June 2005,
under the managers with over 30 years experience in Large Scale retail business in Africa.
Researchers have used various alternative methods for analysis and predicting business
failures but a clear overview and discussion of what the financial statements should reveal
varies between businesses. More in particular, this study extensively shows that the
Altman's Z-score model can effectively be used to provide a clear insight into and trace the
path of fmancial deterioration towards business failure. Using descriptive statistics, Pearson
product moment of correlation and bivariate regression it is important to recognize the
complex, contextual nature of business failure. These measurements showed a high degree
of correlation or collinearity with each other. Effects of each independent variable were
done using multiple regression analysis from which multiple comparisons between the
results of the research data were made to draw conclusions on Uchumi Supermarket Ltd's
business failure in June 2005. In assessment, financial ratios within Altman's context show
that business failure is markedly significant when the Z-score deteriorates towards the
recommended Altman's Z score of insolvency, which is below 1.81. The analysis within
Altman's classification results show Altman's Multivariate Model as an important tool for
use in financial management, an excellent predictor and indicator of business failure at
within a period of two years. The model is also suitable for use in financial management,
credit worthiness analysis, undesirable investment and risk analysis for portfolio managers
and individual investors.