A Comparative Analysis of the Effectiveness of Three Solvency Management Models
22 Pages Posted: 29 May 2008
Date Written: May 28, 2008
The introduction of the Altman's Z-score model in 1983 and much recently the Enyi's Relative Solvency Ratio model in 2005 has divergently provided financial analysts with alternative methods of analyzing corporate solvency which hitherto was exclusively done using the traditional historical record based ratio analysis, with particular reference to the current ratio. To test the relevance and effectiveness of the three models, real life performance data were extracted from the annual reports of 7 quoted companies, analyzed using the three models and the results compared to show the strengths and weaknesses of each. The result revealed that the current ratio and the Z-score models suffer from many limitations including imprecision while the Relative Solvency Ratio combines the capability of an effective indicator with the precision required of a true predictor.
Keywords: Solvency, Liquidity, Ratio Analysis, Bankruptcy, Performance, Relative Solvency, Working Capital, Current Ratio, Current Assets, Balance Sheet
JEL Classification: G33, G29, M21, M41
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