International Journal of Economics, Commerce and Management Research Studies

Volume 1, Issue 2, September - 2018

The use of Zmijewski Model in Examining

the Financial Soundness of Oil and Gas
Companies Listed at Kuwait Stock Exchange
Musaed S. AlAli Khuloud M. AlAwadhi
Assistant Professor Assistant Professor
Department of Insurance and Banking Department of Insurance and Banking
College of Business Studies, PAAET, Kuwait. College of Business Studies, PAAET, Kuwait.

Mansour M. AlShamali Aldana M. AlSabah

Professor Instructor
Department of Insurance and Banking Department of Insurance and Banking
College of Business Studies, PAAET, Kuwait. College of Business Studies, PAAET, Kuwait.

Abstract:-This study aims to examine the financial

soundness of companies listed in the oil and gas sector at
the Kuwait stock exchange for the period 2010 to 2017.
Kuwait is an oil rich country where oil exports presents
nearly 92% of its GDP, which was $138.51 billion in 2017.
This huge dependence on oil makes the oil and gas sector
vital to the whole of Kuwait economy. Companies listed in
the oil and gas sector at the Kuwait stock exchange are the
major contractures for the government in that field
making them very important to the Kuwaiti economy. In
determining the financial soundness of these companies,
Zmijewski X-score model is widely used in evaluating
companies' financial position. The results obtained from
this study showed that companies working in that sector
tend to have a healthy financial position and they are in
the safe side when it comes to bankruptcy risk. The study Fig 1:- Crude Oil Price
also observed that companies facing declining X-score filed
for delisting from the Kuwait stock exchange market. There are eight companies that are listed in the oil and
gas sector at the Kuwait stock exchange market as seen in
Keywords:- Zmijewski X-Score, Oil and Gas Sector, Kuwait table 1. The market capitalization for these companies in 2017
Stock Exchange Market, Bankruptcy, and Financial Stress. was KWD 216 million ($713 million) which represents 0.75%
of total market capitalization.
I. INTRODUCTION
No. Company Name Abbreviation
Kuwait is a country that relies heavily on its oil exports; 1 Independent Petroleum Group IPG
it produces 3 million barrels of oil per day. The GDP of
Kuwait in the year 2017 was $138.51 billion where oil exports 2 Senergy Holding Company SHC
accounted for almost 92% of it. The companies working on 3 National Petroleum Services NPSC
the field of oil and gas depend heavily on government Company
contracts in generating their revenues. Oil prices tend to be 4 Construction and Marine Services CMS
volatile, as seen in figure 1, and this volatility affects the Company
income of the Kuwaiti government in which affects the 5 Ikarus Petroleum Industries Ikarus
number of contracts the government offers resulting in Company
unsettled revenues for these companies. These unsettled flows 6 Gulf Petroleum Investment GPIC
of revenues might affect the financial position of these Company
companies in terms of their ability to honor their obligations 7 Energy House Holding Company EHHC
toward their creditors.
8 Burgan Well Drilling Company Burgan
Table 1. List of Oil and Gas Companies

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 International Journal of Economics, Commerce and Management Research Studies
The issue of bankruptcy prediction and the financial
soundness of companies has captured the attention of many
researches for over 50 years, but that attention has increased
after the financial crises that hit the financial markets in recent
years causing many companies to file for
bankruptcy.Zmijewski (1984) used the following definition of
financial distressed firms: “the act of filing a petition for
bankruptcy”. Platt and Platt (2002) define financial distress as
a late stage of corporate decline that precede the more
destructive event, which is bankruptcy. According to McKee
(2003) there are several events that a company goes through
before going into bankruptcy. He mentioned that inadequate
income and inadequate liquid asset position as the two stages
before bankruptcy.Sormunen and Lailinen (2012) stated that
the process of financial distress also consists of several stages,
which are;
 Early stage: In this stage,a decline in profitability in the
financial statements is observed.
 Late stage: The decline in profitability is accompanied by a
rise in leverage in the financial statements.
 Final stage: The decline in profitability is accompanied by
the increase in leverage and the decline in liquidity in the
financial statements.
In determining the financial soundness of companies,
Zmijewski X-score model is one of the most used models. In
developing the X-score model, Zmijewski (1984) used the
data of 40 bankrupt and 800 non-bankrupt industrial firms’ for
the period 1972–1978. He claimed that the model achieved
99% accuracy rate in determining the bankruptcy of
companies two years prior to it. Zmijewski (1984) model is
based on accounting variables unlikeShumway (2001) and
Hillegeist et al. (2004) where they are based on market
variables. Agarwal and Taffler (2008) compared the
performance of market-based and accounting-based
bankruptcy prediction models in a study that covered all non-
finance industry UK firms fully listed on the London Stock
Exchange (LSE) during the period 1985-2001. They
concluded that accounting-based models were better due to
many reasons such as bankruptcy is not a sudden event but is
the result of several years of adverse performance and these
financial performances can be captured by the financial
statements of the firm. Another reason they stated is that loan
covenants of firms are generally based on accounting numbers
and this information is reflected in the financial statements of
the firms. They also mentioned that accounting-based models
are popular among practitioners because the necessary data for
the market-based models are not always available.
There have been numerous studies comparing the
accuracy of financial distress models. Avenhuis (2013)
examined the prediction power for Altman, Ohlson and
Zmijewski for Dutch companies for the period 2005-2012.
When the original statistical techniques were used, the
accuracy rates for the validation sample for the models of
Altman (1968), Ohlson (1980), and Zmijewski (1984) models
are respectively 80.6%, 93.8%, and 95.3%. Fatmawati (2012)
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Volume 1, Issue 2, September - 2018
conducted a study of using the models for bankruptcy of
Zmijewski, Altman, and Springate as predictors on delisted
companies in Indonesia Stock Exchange. The sample was
obtained from 30 companies delisting ranging from 2003 to
2009 with a comparison of 30 companies are still listed on the
Stock Exchange. He concluded that Zmijewski model was the
most precise in predicting the delisting of companies. Aminian
et al. (2016) conducted a study that included 35 companies
from textile and ceramic and tile companies listed on the
Tehran Stock Exchange during the period 2008 to 2013. By
comparing the results of Altman model, Springate model,
Grover model, and Zmijewski model, they concluded that
Zmijewski model was statistically significant in predicting
financial crises. Djamaluddin et al. (2017) examined the
financial soundness of 20 Japanese electronic manufacturing
companies during the period 2009-2015 to measure the effect
of the global financial crisis on them. They concluded that
Zmijewski model was able to achieve an accuracy rate in
detecting bankruptcy of 53.57%.
II. DATA AND METHODOLOGY
The results presented in this research were based on the
annual financial data that were obtained from the annual
reports of the eight companies listed under the oil and gas
sector at Kuwait stock exchange over the period 2010 to 2017.
The annual reports and financial data were downloaded from
the Kuwait stock exchange website and the Kuwait Institute of
Banking Studies database.
Zmijewski (1984)X-score model is the most commonly
used model by accounting researchers (Grice and Dugan,
2003), it adopts a probit method to model bankruptcy which
uses financial ratios measuring firm’s performance, leverage,
and liquidity. The ratios were selected on the basis of their
performance in the previous studies. The model used 40
bankrupt and 800 non-bankrupt industrial firms’ data for the
period 1972–1978. The constructed probit function with the
variables and estimated coefficients from the study of
Zmijewski (1984) are as follows:
Zmijewski X-score = −4.3 − 4.5𝑋1 + 5.7𝑋2 + 0.004𝑋3
……………………. (1)
Where
X1 = Net income / Total assets = ROA
X2 = Total liabilities / Total Assets
X3 = Current assets / Current liabilities = Current ratio
Unlike Altman's Z-model, Zmijewski X-Score does not
have criteria threshold values to compare the results against.
Many such as Djamaluddin et al. (2017) divided the X-score
obtained from Zmijewski model into two classes. If the X-
score is negative (X-Score <0), then the company is classified
in a healthy condition. Contrariwise, if the X-score is positive
(X-Score ≥ 0) then the company can be classified under
unsanitary conditions or likely to lead to financial distress.
The ratios used to calculate the X-score are shown in table 2.
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 International Journal of Economics, Commerce and Management Research Studies
Volume 1, Issue 2, September - 2018
Zmijewski (1984) model selected ratios that reflect the
firm'sperformance, leverage, and liquidity. In measuring the
performance side, he used return on assets (ROA) for it.
Return on assets (ROA) measures how efficient the company
is in generating income. The higher ROA a company achieves
the better financial position it will be in keeping it away from
the bankruptcy risk. The higher this ratio indicated that the
company is in better position to honor its obligations towards
its creditors. Bever et al. (2005), using NYSE data found that
the mean ROA of non-bankruptcy firms is relatively higher
than that on the bankruptcy firms’ and the bankrupt firms’
ROA decreased over the four years prior to bankruptcy. Millar
and Chen (2004) found a negative relationship between firm
ROA and bankruptcy risk.

It can be seen from table 2 and figure 2 that NPSC is

leading the companies in that category. NPSC have been
running an upward trend ROA during the study period. On an
average NPSC had an average ROA of 17.98% during the
study period compared to -12% for SHC, while the average
ROA for the oil and gas sector was 0.63%. Fig 2:- Return on Assets for Oil and Gas Companies

Table 2. Financial Ratios for Oil and Gas Companies

The activities of any company are funded through debt
and equity (Bhandari& Weiss, 1996). The existence of this
debt, resulting in an obligation to make periodic payments, is
one of the biggest factors contributing to the risk of financial
distress. The greater the financial leverage, the higher the
chance of financial distress and bankruptcy as periodic
payments have to be made on the debt which are often not
required for equity financing. For measuring leverage,
Zmijewski used total liabilities to total assets. The average
total liabilities to total assets ratio for the sector during the
study period was 39.92%. SHC had the best ratio of 15.24%
compared to other companies working in the sector followed
by EHHC. On the other side, IPG had the highest ratio making
it more exposed to financial stress.

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 International Journal of Economics, Commerce and Management Research Studies
Volume 1, Issue 2, September - 2018

Fig 3:- Total Liabilities / Total Assets Ratio for Oil and Gas Fig 4:- Current Ratio for Oil and Gas Companies
Companies
III. RESULTS AND FINDINGS
Current ratio indicates the ability of any company to
meet it short-term debt obligations. This ratio also works as The results presented in table (3) illustrates the financial
soundness of the companies listed in the oil and gas sector at
insurance to the company to handle any unexpected
the Kuwait stock exchange. It can be seen that all companies
commitment they might encounter. Al-Najjar (2009) found a
statistically significant negative relation between bankruptcy had a negative X-score during the study period except for IPG
and the current ratio. The average current ratio for the where it had a positive X-score during the period 2010-2012
companies in that sector was 1.869 times. Although Ikarus had but that risk of bankruptcy was eased in 2013 when the score
the highest ratio of 4.197 times, that average came as a result went to negative territories. When it comes to the best
performer among companies working in that sector, it can be
of huge unexplainable ratio in the year 2013 of 16.999 times.
seen that NPSC was the best performer followed by SHC.
If omitting this year data from the calculation, then the
NPSC had outperformed all its rivals in both the return on
average ratio for Ikarus would be 1.638 times. In 2017, NPSC
assets (ROA) and the current ratio categories. SHC came
had the highest current ratio among all companies working in
second most unlikely company to face bankruptcy in 2017
the sector with a ratio of 4.288 times followed by SHC with a
despite showing negative ROA ratio during the 2010-2016
ratio of 3.161. This would indicate that these two companies
period.The reason for that is the low total liabilities to total
are capable of handling any unexpected short-term obligations
they might encounter. On the other side, GPIC had a current assets ratio and high current ratio.
ratio of only 0.718 times which means that GPIC is vulnerable
to any unexpected short-term obligations.

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 International Journal of Economics, Commerce and Management Research Studies
Volume 1, Issue 2, September - 2018
2010 2011 2012 2013 2014 2015 2016 2017
Constant -4.336 -4.336 -4.336 -4.336 -4.336 -4.336 -4.336 -4.336
X1 0.000 0.075 -0.066 -0.076 -0.053 -0.061 -0.082 -0.097
X2 4.451 4.733 4.472 4.321 4.173 3.930 3.973 3.823
IPG X3 0.004 0.004 0.004 0.004 0.004 0.004 0.004 0.004

X-Score 0.119 0.476 0.074 -0.087 -0.211 -0.463 -0.441 -0.606

Constant -4.336 -4.336 -4.336 -4.336 -4.336 -4.336 -4.336 -4.336

X1 0.168 0.781 -0.183 0.594 2.097 0.136 0.768 -0.027
X2 0.696 0.866 0.663 0.590 0.955 1.048 1.104 1.001
SHC
X3 0.007 0.005 0.009 0.011 0.009 0.013 0.011 0.013

X-Score -3.466 -2.685 -3.847 -3.141 -1.275 -3.138 -2.452 -3.349

Constant -4.336 -4.336 -4.336 -4.336 -4.336 -4.336 -4.336 -4.336

X1 -0.415 -0.621 -0.565 -0.662 -0.712 -1.054 -1.189 -1.275
X2 1.463 1.373 1.135 1.278 1.339 1.237 1.332 1.200
NPSC
X3 0.009 0.010 0.015 0.012 0.014 0.016 0.016 0.017

X-Score -3.278 -3.574 -3.752 -3.709 -3.695 -4.137 -4.176 -4.394

Constant -4.336 -4.336 -4.336 -4.336 -4.336 -4.336 -4.336 -4.336

X1 -0.118 -0.125 -0.116 -0.099 -0.060 -0.066 -0.038 N/A
X2 3.112 3.072 2.971 3.248 3.542 3.988 4.196 N/A
CMS
X3 0.004 0.004 0.004 0.002 0.003 0.003 0.002 N/A

X-Score -1.338 -1.385 -1.478 -1.185 -0.851 -0.410 -0.176 N/A

Constant -4.336 -4.336 -4.336 -4.336 -4.336 -4.336 -4.336 -4.336

X1 -0.120 -0.209 -0.229 -0.265 -0.235 0.248 N/A N/A
X2 1.132 1.032 1.278 0.915 1.160 1.856 N/A N/A
Ikarus
X3 0.002 0.002 0.002 0.068 0.009 0.017 N/A N/A

X-Score -3.322 -3.511 -3.285 -3.617 -3.402 -2.215 N/A N/A

Constant -4.336 -4.336 -4.336 -4.336 -4.336 -4.336 -4.336 -4.336

X1 0.050 -0.130 -0.106 -0.187 -0.262 0.456 -0.150 0.164
X2 3.249 3.028 2.469 1.721 1.935 1.678 1.471 1.616
GPIC
X3 0.002 0.002 0.001 0.001 0.001 0.002 0.001 0.003

X-Score -1.036 -1.436 -1.972 -2.801 -2.662 -2.201 -3.014 -2.553

Constant -4.336 -4.336 -4.336 -4.336 -4.336 -4.336 -4.336 -4.336

X1 -0.422 0.319 0.730 -0.090 0.081 0.470 1.583 0.424
X2 1.481 1.180 1.145 0.760 0.584 0.831 1.664 1.692
EHHC
X3 0.013 0.011 0.006 0.006 0.009 0.007 0.005 0.004

X-Score -3.264 -2.826 -2.455 -3.660 -3.661 -3.028 -1.084 -2.216

Constant -4.336 -4.336 -4.336 -4.336 -4.336 -4.336 -4.336 -4.336

X1 -0.048 -0.036 -0.057 -0.064 -0.036 -0.065 -0.063 -0.065
X2 3.962 3.790 3.661 3.435 3.723 3.748 3.819 3.876
Burgan
X3 0.002 0.003 0.004 0.002 0.005 0.003 0.003 0.003

X-Score -0.421 -0.580 -0.728 -0.962 -0.644 -0.650 -0.577 -0.522

Table 3. Zmijewski X-Score Results

On the flip side, it can be seen that Burgan had the lowest X-
score in 2017 of -0.522 followed by IPG that had an X-score
of -0.606 compared to -2.273 for the sectors' average in the
year 2017.
During the study period two companies (Ikarus in 2016
and CMS in 2017) filed for delisting from the Kuwait stock
exchange market. By looking at figure 6, it can be seen that
both companies had a negative X-score. Looking at the
average change in the X-score for the companies, figure 7,
shows that Ikarus and CMS had the highest mean change in
the X-score. This positive mean X-score change would
indicate that these companies were heading to financial
difficulties in the future and by getting delisted these
companies will be able to keep their financial data unrevealed
to the public and force the shareholders to trade their shares in
the gray market.

Fig 5:- Zmijewski X-Score

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 International Journal of Economics, Commerce and Management Research Studies
Fig 6:- X-Score for Delisted Companies
Fig 7:- Average Change in X-score
IV. CONCLUSION
This study attempts to measure the financial soundness
of companies listed in the oil and gas sector at the Kuwait
stock exchange market. Kuwait is a country that relies heavily
on oil exports to generate its revenues. Companies working in
the oil and gas sector depend on the government contracts to
generate their revenues, but since the oil price is not stable,
this would affect the revenues these companies get from their
contracts. This uncertainty in revenues would have an impact
of the company’s financial position. In examining the financial
health of these companies, Zmijewski X-score model was used
in this study. The results showed that companies working in
that sector enjoyed a healthy financial position but when
matters starts to get worse, they choose to file for delisting
from the market. The research showed that the average change
in the X-score can be a good indicator to where a company
financial position in heading to in terms of financial
soundness.
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Volume 1, Issue 2, September - 2018
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