D.

Camska Predicting Financial Distress of Companies in The Agricultural Sector

PREDICTING FINANCIAL DISTRESS OF COMPANIES IN THE

AGRICULTURAL SECTOR

Dagmar Camska1, PhD candidate, teaching assistant

Department of Business Economics, Faculty of Business Administration, University of Economics, Prague

Abstract. 7KLV SDSHU LV IRFXVHG RQ SUHGLFWLQJ ¿QDQFLDO GLVWUHVV RI DJULFXOWXUDO FRPSDQLHV LQ WKH &]HFK 5HSXEOLF
between 2008 and 2011. This period is connected with the world crisis in many branches. Although, agriculture itself
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WKHFRQWUDU\¿QDQFLDOYLDELOLW\LVDFUXFLDOLVVXHIRUHYHU\FRPSDQ\7KHUHDUHQXPHURXVDSSURDFKHVKRZWRSUHGLFW
WKHFRUSRUDWH¿QDQFLDOGLVWUHVV7KHSDSHUGHDOVZLWKFUHGLWVFRULQJV\VWHPVUHSUHVHQWHGE\$OWPDQ=6FRUHDQG&+
DQG*LQGLFHVXVHGLQWKH&]HFK5HSXEOLF7KH&]HFK6WDWH$JULFXOWXUH,QWHUYHQWLRQ)XQGXVHVLWVRZQPHWKRGRORJ\
FUHDWHGVSHFL¿FDOO\IRUDJULFXOWXUDOFRPSDQLHV$FUXFLDOTXHVWLRQUHPDLQVZKHWKHUWKHVHDSSURDFKHVSURYLGHVXI¿FLHQW
DQVZHUVRQWKHFRUSRUDWH¿QDQFLDOYLDELOLW\DQGZKHWKHUWKH\FDQEHFRQVLGHUHGUHOLDEOH7KHIRXUPHQWLRQHGPRGHOV
DUHFDOFXODWHGIRUDGDWDVDPSOHZKLFKFRQVLVWVRI&]HFKODUJHDJULFXOWXUDOFRPSDQLHV5HVXOWVRIWKHFDOFXODWLRQ
DQGFRPSDULVRQEHWZHHQPRGHOVOHDGVWRWKHFRQFOXVLRQWKDWLWLVVLJQL¿FDQWLIWKHUHKDVDOUHDG\H[LVWHGDVXI¿FLHQW
PRGHORULIWKHUHLVDJDSZKLFKVKRXOGEH¿OOHGE\DFUHDWLRQRIDQHZSUHGLFWLRQIRUPXODIRUDTXLFNDQVZHURQWKH
¿QDQFLDOKHDOWKRIDFRPSDQ\LQWKHDJULFXOWXUDOVHFWRU
Key words:FRUSRUDWH¿QDQFLDOYLDELOLW\SUHGLFWLQJIRUPXODV&]HFK5HSXEOLF
JEL code: G33, Q14

Introduction XVHG LQ WKH &]HFK 5HSXEOLF 0DQDVRYD  KDV

7KH ¿QDQFLDO KHDOWK RU YLDELOLW\ LV D FUXFLDO LVVXH collected the best results using Altman Z Score. This
for every company regardless of the sector in which PRGHOLVVRSRSXODUWKDWLWLVWKHYHU\¿UVWLQVWDQFHXVHG
the company runs its business. No company is able to
VXUYLYHDORQJWHUPSRRU¿QDQFLDOVLWXDWLRQZKLFKUHVXOWV
in bankruptcy and the disappearance from the market.
Managers are not interested in trading with companies
ZKRVH¿QDQFLDOVLWXDWLRQLQGLFDWHVSRWHQWLDOEDQNUXSWF\
There has been a serious research since the 1960s on
¿QDQFLDOLQGLFDWRUVZKLFKFDQEHXVHGIRUWKHSUHGLFWLRQ
RI FRUSRUDWH ¿QDQFLDO GLVWUHVV RU EDQNUXSWF\ 7KH ¿UVW
models were completed by American researchers such
as W. H. Beaver and E.I. Altman. Although Altman´s
formulas are still used, new models are being developed
as well because the need to evaluate the company’s
situation remains. However, not the company itself lacks
scoring models but the suppliers, customers, banks or
other institutions, government etc. need the models in
order to assess a quick evaluation, serving to support
their decision.
7KH DJULFXOWXUDO VHFWRU LV VSHFL¿F LQ PDQ\
characteristics. The difference between agricultural and
LQGXVWULDOVHFWRUFDQEHGH¿QHGDVDVWURQJGHSHQGHQF\
on natural conditions, time discrepancy during
manufacturing process, and the work and seasonality
of work (Synek M. and Kislingerova E., 2010). Another
difference represents high subsidising, which softens the
market mechanism. The role of subsidies in managing the
operating risk of agricultural enterprises was analysed
in prDFWLVH,QFRQWUDVW6XVLFN\KLJKOLJKWVVSHFL¿F
DJULFXOWXUDO DSSURDFKHV DV &+ DQG * LQGLFHV 7KLUG WKH
&]HFK 6WDWH $JULFXOWXUH ,QWHUYHQWLRQ )XQG XVHV LWV RZQ
methodology in order to evaluate companies asking
for subsidies. The research task is to investigate if
WKHVH DSSURDFKHV SURYLGH VXI¿FLHQW DQVZHUV DERXW WKH
FRUSRUDWH¿QDQFLDOYLDELOLW\RUQRW3UHYLRXVVWXGLHVKDYH
used accounting data available before 2009.
The aforementioned approaches will be applied to real
¿QDQFLDOGDWDREWDLQHGIURPWKH&]HFKFRUSRUDWHGDWDEDVH
Albertina. The results of used models are compared, and
the differences are analysed in the following sections.
Research results and discussion
Financial health can be evaluated by many subjects
using different pieces of information. This paper is focused
on the quick answer for subjects as suppliers, customers,
banks, or government, and thus, scoring models are
used in the research. Scoring approaches provide a quick
answer, which has unfortunately less explanatory power
than the rating. The next sub-section introduces several
PRGHOVXVHGIRUSUHGLFWLQJ¿QDQFLDOGLVWUHVVDQGIXUWKHU
applied in the author’s analysis.
0RGHOVXVHGIRUSUHGLFWLQJ¿QDQFLDOGLVWUHVV
E\6SLFNDLQWKH&]HFK5HSXEOLF7KHDJULFXOWXUDO
EUDQFK VHHPV VR VSHFL¿F WKDW WKH PRGHOV FDQQRW EH
applied generally. It leads to the hypothesis that general
indicators cannot be used in the agricultural sector.
The research aim is to test scoring systems, which
SUHGLFWWKHFRUSRUDWH¿QDQFLDOGLVWUHVV3UHYLRXVVWXGLHV
and government practise are the sources of approaches
___________________________
1
&RUUHVSRQGLQJDXWKRUE-mail: Dadik.Camska@seznam.cz
Economic Science for Rural Development No. 30, 2013
ISSN 1691-3078
It has already been mentioned in the introduction
that Altman’s approaches are still used, although, their
beginnings date back to the 1960s (Altman E.I., 1968).
7KH ¿UVW $OWPDQ =6FRUH ZDV PHQWLRQHG RQO\ IRU ODUJH
companies listed on the stock exchange. This paper
XVHV$OWPDQ=6FRUHZKLFKZDV¿UVWLQWURGXFHGLQ 1977
and used for companies, which are not listed on capital
257
 D. Camska Predicting Financial Distress of Companies in The Agricultural Sector

markets. The reason for using revised Altman formula is that companies not listed on the stock exchange overweight in
WKH&]HFK5HSXEOLF7KH$OWPDQSUHGLFWLRQPRGHOJHQHUDOLVHVFRPSDQLHVDQGWKHVHFWRURIDJULFXOWXUHKDVLWVVSHFL¿FV
as it is mentioned above. On the contrary, the agricultural companies are companies in the market economy as well
and the relative comparison using Altman formula makes sense also in this case. The Altman model formula and its
evaluation (Table 1) can be found bellow.

, (1)

Source: Altman E.I., 2012

where
EBIT - earnings before interest and tax;
A - total assets;
S - sales;
E - equity;
L - total liabilities;
RE - retained earnings;
1:& - net working capital.

7KH $OWPDQ PRGHO SUHGLFWLQJ ¿QDQFLDO GLVWUHVV KDV VHYHUDO GLVDGYDQWDJHV DVLW LV D KLVWRULFDO PRGHO ZKLFK ZDV
based on American data, especially developed for industrial sector and designed for large companies.
Slovak authors came up with their own distinctive approach, which should respect the conditions of the agricultural
VHFWRU DQG 6ORYDN HFRQRP\ VLQFH PRGHOV ZHUH FUHDWHG ZLWK WKH KHOS RI WKH 6ORYDN ¿QDQFLDO GDWD 7KH HFRQRPLF
GHYHORSPHQWRIWKH6ORYDN5HSXEOLFLVYHU\VLPLODUWRWKH&]HFK5HSXEOLFEHFDXVHRIFRPPRQKLVWRU\XQWLOWKHVH
DSSURDFKHVVKRXOGWKXVEHWUDQVIHUDEOHZLWKLQWKH&]HFKHQYLURQPHQWDQGFRQGLWLRQV7KH¿UVWPRGHONQRZQDVWKH
&+LQGH[ZDVLQWURGXFHGLQE\&KUDVWLQRYD

, (2)

Source: Chrastinova Z., 1998

where
E - earnings;
A - total assets;
R - revenues;
&$ - current assets;
STL - short-term liabilities;
D - debts.

7KHVHFRQGLQGH[LVFDOOHG*LQGH[DIWHULWVDXWKRU/*XUFLNWKH*LQGH[LVQHZHUWKDQWKH&+LQGH[)RUPXODRI
the G-index is displayed below.

, (3)

Source: Gurcik L., 2002

where
RE - retained earnings;
A - total assets;
R - revenues;
S - sales;
&) - FDVKÀRZ
INV - inventories.

258 Economic Science for Rural Development No. 30, 2013

ISSN 1691-3078
 D. Camska Predicting Financial Distress of Companies in The Agricultural Sector

Table 1
Evaluation of Z Score, CH and G indices

Evaluation Z Score CH index G index

Unhealthy = &+ *
Grey Zone = &+ *
Healthy = &+ *
Source: Altman E.I., 2012; Chrastinova Z., 1998; Gurcik L., 2002

Table 2
Evaluation of SAIF methodology

Category Value Financial support

A 25.01 – 31.00 $FFHSWDEOH¿QDQFLDOVLWXDWLRQ
B 17.01 – 25.00 $FFHSWDEOH¿QDQFLDOVLWXDWLRQ
& 15.01 – 17.00 $FFHSWDEOH¿QDQFLDOVLWXDWLRQ
D 12.51 – 15.00 8QDFFHSWDEOH¿QDQFLDOVLWXDWLRQ
E 9.00 – 12.50 8QDFFHSWDEOH¿QDQFLDOVLWXDWLRQ
Source: Statni zemedelsky intervencni fond, 2012

The last introduced approach is used nowadays 6$,)LVXVHGLQWKH&]HFK5HSXEOLFDQGLWVKRXOGVXSSRUW

LQ WKH &]HFK 5HSXEOLF E\ WKH 6WDWH $JULFXOWXUDO
Intervention Fund (SAIF). The agricultural sector can
EH KLJKO\ VXEVLGLVHG LQ WKH &]HFK 5HSXEOLF ZKLFK
changes and softens market conditions. The models
PHQWLRQHG DERYH XVH DQQXDO ¿QDQFLDO GDWD IRU
HYDOXDWLRQ WDNLQJ LQWR DFFRXQW ¿YH EDVLF FULWHULD
0HWKRGRORJ\ XVHG E\ WKH )XQG XVHV DQQXDO ¿QDQFLDO
data as well but it demands three years for evaluation.
Results, based on nine criteria displayed below, are
averaged. This approach is based on points allocation
(7 criteria - possible results 1, 2 or 3 points and two
criteria - 1, 3 or 5 points) according to the value of a
selected indicator. Indicators selected by the State
Agricultural Intervention Fund are as follows:
— return on assets;
— long-term return;
— value added / inputs;
— UHWXUQRQVDOHVFRXQWHGIURPFDVKÀRZ of scoring models, which are most reliable for large or
— total debt;
— interest coverage;
— SHULRGRIGHEWUHSD\PHQWFRXQWHGIURPFDVKÀRZ %DVLF¿QDQFLDOVWDWHPHQWVRIFRPSDQLHVDUHREWDLQHG
— cover inventory by net working capital;
— total liquidity.
8QIRUWXQDWHO\ LQGLFDWRUV DUH QRW GH¿QHG DV UDWLRV
of two items because the case is more complex. Details
DUH VSHFL¿HG LQ WKH 6WDWH $JULFXOWXUDO ,QWHUYHQWLRQ
Fund (2012). The State Agricultural Intervention Fund
HYDOXDWHV DSSOLFDQWV ZKR DVN IRU ¿QDQFLDO VXSSRUW 7KH
¿QDQFLDO KHDOWK RU VLWXDWLRQ LV RQH RI WKH FULWHULD ZKLFK
LV FUXFLDO IRU WKH ¿QDO GHFLVLRQ $SSOLFDQWV DUH GLYLGHG
DFFRUGLQJ WR WKH UHVXOWV RI QLQH ¿QDQFLDO LQGLFDWRUV LQ
WKUHH\HDUVLQWR¿YHFDWHJRULHVDVVKRZQLQ7DEOH
The author has introduced four different approaches.
The Altman formula is general and one of the oldest.
7KH &+ LQGH[ DQG * LQGH[ ZHUH FUHDWHG HVSHFLDOO\ IRU
agricultural companies and they should not follow any
concrete aim. In contrast, the methodology used by the
the decision if the business units can or cannot gain
agricultural subsidy. The following section is dedicated
WRWKHGHVFULSWLRQRIXQLWVZKRVH¿QDQFLDOFRQGLWLRQVDUH
evaluated in the research.
2. Analysed units
The reliability of introduced models will be tested
ZLWK WKH KHOS RI WKH &]HFK DJULFXOWXUDO EXVLQHVVHV 7KH
data sample consists of large agricultural companies
because of several reasons. First, large companies have
DYDLODEOH ¿QDQFLDO GDWD DOWKRXJK LW LV REOLJDWRU\ WR
SXEOLVKEDVLF¿QDQFLDOVWDWHPHQWVWKH&]HFKFRPSDQLHV
VRPHWLPHV GR QRW IXO¿O WKLV UHTXLUHPHQW EHFDXVH WKHUH
LVQRSXQLVKPHQWVSHFL¿HG6HFRQGODUJHFRPSDQLHVDUH
relatively stable and have the best potential to survive
LQ WKH WXUEXOHQW HQYLURQPHQW EHFDXVH RI GLYHUVL¿HG
production. The third reason is based on the results
PHGLXPVL]HGFRPSDQLHV1HXPDLHURYD,1HXPDLHU,
2005; Narayanan L., 2010).
IURPWKH&]HFKFRUSRUDWHGDWDEDVH$OEHUWLQD$FFRUGLQJ
WR WKH FODVVL¿FDWLRQ &=1$&( WKH DXWKRU XVHV WKH
VHFWLRQ$DQG3DUW±³$JULFXOWXUHKXQWLQJDQGUHODWHG
VHUYLFH DFWLYLWLHV´ 7KH ¿UVW FRQVWUDLQW EHORQJLQJ WR
the agricultural sector, leads to 86 538 records in the
database. The second constraint is represented by data
availability (annual statements for 2008, 2009, 2010, and
2011) and it narrows down the data set to 3 747 records.
It is necessary to exclude all companies, which do not
have data available at least for three last years because
the SAIF methodology works with three years’ time
VHULHV7KHWKLUGFRQVWUDLQWLVEDVHGRQWKHFRPSDQ\VL]H
(over 100 employees) and it is the most restrictive one.
After restriction of Number 3, there were 155 individual
records, yet, during the analysis, they were limited to
142 companies. This could be attributed to the following

Economic Science for Rural Development No. 30, 2013 259

ISSN 1691-3078
 D. Camska Predicting Financial Distress of Companies in The Agricultural Sector

Table 3
Results for Altman Z-Score, CH and G indices

Number of subjects
Evaluation Z Score CH index G index
Healthy 3 4 11
Grey Zone 63 138 116
Unhealthy 76 0 15
6RXUFHDXWKRU¶VFDOFXODWLRQVEDVHGRQ¿QDQFLDOVWDWHPHQWV

Table 4
Results for the SAIF methodology

Category Number of subjects $FFHSWDQFHRI¿QDQFLDOVLWXDWLRQ

A 99 yes
B 39 yes
& 3 yes
D 1 no
E 0 no
6RXUFHDXWKRU¶VFDOFXODWLRQVEDVHGRQ¿QDQFLDOVWDWHPHQWV

Table 5
%DVLF¿QDQFLDOUDWLRVIRUDJULFXOWXUHDQGPDQXIDFWXULQJLQGXVWU\

Financial ratio Agriculture 2010 Agriculture 2011 Manufacturing 2010 Manufacturing 2011
ROE 3.74% 5.71% 11.61% 11.52%
ROA 4.03% 6.12% 7.30% 7.2%
Total asset turnover 0.26 0.2 1.3 1.37
Equity/Assets 88.34% 88.89% 51.04% 49.77%
Source: Ministerstvo prumyslu a obchodu, 2012

reasons – some units did not have compact three years 2EWDLQHG UHVXOWV VLJQL¿FDQWO\ GLIIHU 7KH 6$,)
time series or the unit did not develop economic activity methodology sees the majority of subjects (141) as
in one year and the results would be negatively affected. KDYLQJ VXI¿FLHQW ¿QDQFLDO KHDOWK IRU JHWWLQJ VXEVLG\
3. Results
This part includes tables, which describe the results
obtained by the four aforementioned approaches
HYDOXDWLQJFRUSRUDWH¿QDQFLDOVLWXDWLRQ$WWKHHQG
companies were analysed in the research. The Altman
=6FRUH&+DQG*LQGLFHVZHUHFDOFXODWHGIRUWKHPRVW
recent data available and the SAIF methodology was
FDOFXODWHG IRU UHFHQW  \HDUV 7KH =6FRUH &+ DQG *
indices were evaluated as described above without any
PRGL¿FDWLRQ 7KH 6$,) PHWKRGRORJ\ ZDV PRGL¿HG LQ
terms of indicator 6 - interest coverage. This variation
was necessary because if the company has no interest,
WKHDXWKRUGLYLGHV(%,7E\]HURZKLFKLVLPSRVVLEOH,I
WKHFRPSDQ\KDV]HURLQWHUHVWLWFDQUHFHLYHXSWRWKUHH
SRLQWV DW PD[LPXP 1R RWKHU PRGL¿FDWLRQV KDG EHHQ
applied apart from the aforementioned.
Results obtained are displayed in Tables 3 and 4.
7DEOH  SUHVHQWV WKH =6FRUH &+ DQG * LQGLFHV VLQFH
all three approaches divide the analysed units into
WKUHH ]RQHV 7DEOH  GLVSOD\V WKH 6$,) PHWKRGRORJ\
itself.
260
$OPRVW   VXEMHFWV DUH FODVVL¿HG DV WKH EHVW
category A. On the contrary, the Altman Z-Score is
the strictest predictor because over 50% (76 units)
are evaluated as unhealthy and 44% are part of the
JUH\ ]RQH 5HVXOWV REWDLQHG ZLWK &+ DQG * LQGLFHV GR
QRW GLIIHU 0DMRULW\ RI VXEMHFWV HQGHG XS FODVVL¿HG
LQ WKH JUH\ ]RQH  IRU &+ LQGH[ DQG  IRU
G index).
4. Discussion
7KHYDOXDWLRQRI¿QDQFLDOKHDOWKRUVLWXDWLRQVWURQJO\
depends on choosing the appropriate model. The
Altman Z-Score is not primarily designed for agricultural
VHFWRU 3URIHVVRU $OWPDQ XVHG ¿QDQFLDO GDWD RI
companies from the industry branches when he
created his formula. The results obtained by his
IRUPXOD GHWHFW WKH VKLIW WR WKH EDQNUXSWF\ ]RQH
The main sources of poor results are the indicators
EDVHG RQ SUR¿WV ± HVSHFLDOO\ 52$ RU UHWDLQHG HDUQLQJV
divided by total assets. The weight of ROA in formula
exceeds 3 and it transfers companies to the bankruptcy
]RQH EHFDXVH WKH SUR¿WDELOLW\ RI WKH DJULFXOWXUDO
Economic Science for Rural Development No. 30, 2013
ISSN 1691-3078
 D. Camska Predicting Financial Distress of Companies in The Agricultural Sector
sector is not so high. Table 5 provides a basic comparison
between the value of indicators for agriculture and
manufacturing industry.
$JULFXOWXUDOFRPSDQLHVDUHOHVVSUR¿WDEOHHVSHFLDOO\
measured by the ratio return on equity because they
prefer more equity than debts, and their turnover ratio
is lower as well. The Altman formula was used as the
general prediction model and the results were not
VXI¿FLHQW 7KH DJULFXOWXUDO VHFWRU LV YHU\ VSHFL¿F LQ LWV
need for caution approach.
FRUSRUDWH ¿QDQFLDO YLDELOLW\ LI WKH VXEMHFWV DUH QRW DEOH
to perform the real rating? According to the results
obtained in this paper, the conclusion is ambiguous.
This paper detects a space for creating a new scoring
formula which would be applicable in this time period
LQ WKH DJULFXOWXUDO VHFWRU LQ WKH &]HFK 5HSXEOLF 7KLV
conclusion is supported by calculation and comparison of
IRXUPRVWXVHGPRGHOVLQWKH&]HFK5HSXEOLFLQWKHSDVW
couple of years. These models, unfortunately, did not
SURYLGHVXI¿FLHQWUHVXOWVDQGWKH\FDQEHKDUGO\PDUNHG
,Q FRQWUDVW VSHFL¿F DSSURDFKHV * DQG &+ LQGLFHV as reliable.
did not provide reliable answers because the majority of This research paper is one of the outputs of the project
XQLWV ZHUH FODVVL¿HG LQ WKH JUH\ ]RQH ,I D FRPSDQ\ LV ³)LQDQFLDO 'LVWUHVV  3UHGLFWLRQ DQG &RQVHTXHQFHV´
FODVVL¿HG LQ WKH JUH\ ]RQH LW LV LPSRVVLEOH WR HYDOXDWH registered with the Internal Grant Agency of University
LWV¿QDQFLDOYLDELOLW\DQGWLPHGHYHORSPHQW5HVHDUFKHUV of Economics, Prague.
VLPSO\ LQYHQWHG WKLV ]RQH IRU DPELYDOHQW UHVXOWV 7KHUH
are several reasons why the results obtained by the
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¿QDQFQHKR VWDYX SROQRKRVSRGDUVN\FK SRGQLNRY
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UHSXEOLFH D PQR]QRVWL MHMLFK YFDVQH SUHGLNFH (The
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SURYLGH VXI¿FLHQW DQVZHUV DERXW FRUSRUDWH ¿QDQFLDO
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=6FRUH GRHV QRW UHVSHFW WKH VSHFL¿FV RI DJULFXOWXUDO
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SUR¿WDELOLW\ KLJKHU FRQWHQW RI HTXLW\ DQG ORZHU DVVHW
turnover compared with manufacturing industry. The
hypothesis, that general indicator Altman Z Score
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= 6FRUH RI &XVWRPHUV DQG 6XSSOLHUV Managing
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UHMHFWHG 6SHFL¿F DSSURDFKHV &+ DQG * LQGLFHV DOVR
IDLOHG EHFDXVH FODVVLI\LQJ PDMRULW\ LQ WKH JUH\ ]RQH
does not provide any answer for users. The usage of
SAIF methodology is limited because it favours large
corporations.
The research poses this question: Is there a
scoring model, which would provide a quick answer for
suppliers, customers or other related subjects about
Economic Science for Rural Development No. 30, 2013
ISSN 1691-3078
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(FRQRPLFV ± &]HFK 9ROXPH  ,VVXH 
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¿QDQFQLKR ]GUDYL 5HWULHYHG KWWSZZZV]LIF]
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262 Economic Science for Rural Development No. 30, 2013

ISSN 1691-3078