Predictive Analysis of Financial Distress in Pharma Sector: A Quantitative Approach using Altman’s Z-Score Model

Mahdy S. Othman; Razia Nagina; Anjali Saini

doi:10.61707/cbk5qt36

Authors

Mahdy S. Othman Department of Accounting, College of Business Administration, University of Business and Technology, Jeddah, Saudi Arabia.
Razia Nagina Mittal School of Business, Lovely Professional University, Punjab, India
Anjali Saini Student, Mittal School of Business, Lovely Professional University, Punjab, India

DOI:

https://doi.org/10.61707/cbk5qt36

Keywords:

Altman Z-Score, Financial Distress, Financial Performance, Indian Pharmaceutical Industry, Prediction, Risk Mitigation

Abstract

The research intends to evaluate the financial health of selected pharmaceutical companies and assess its risk of insolvency or bankruptcy by employing Altman’s Z-score Model, a globally recognized tool for detecting corporate insolvency.For this study, the sample selection was determined by market capitalization, encompassing 10 companies representing various market caps: large, mid, small, and micro-cap enterprises. The research spanned from April 1st, 2015, to March 31st, 2022, covering a duration of 8 years. Altman’s Z-score model served as the analytical tool for data analysis. The findings revealed that the majority of Indian pharmaceutical companies were in a safe or healthy financial zone. Medico Remedies Limited, Venus Remedies Limited, Brooks Laboratories Limited, Bafna Pharmaceutical Limited, SMS Life Science India Private Limited, Mangalam Drugs and Organics, and Take Solutions Limited were positioned in the grey zone. However, they had the potential to avoid bankruptcy through effective management decisions such as a focus on improving operational efficiency, reducing debts, and diversifying revenue streams. Conversely, companies such as Wockhardt Ltd., Nectar Lifescience Ltd., Lyka Lab Ltd., and Wanbury were in the bankruptcy zone as they showed signs of significant financial distress. The study uncovered a predominantly positive outlook, indicating that the majority of large, mid-sized, and small pharmaceutical companies in India are financially robust. However, attention is urgently needed to address potential financial risks in the Micro Pharmaceutical sector. In summary, the Indian pharmaceutical industry demonstrates overall financial strength. Policymakers must enact tailored policies to strengthen the Micro Pharmaceutical sector's financial resilience, promoting its economic contribution. Investors should target strategic investments in innovative risk-mitigation initiatives within the sector. Pharmaceutical stakeholders need collaborative efforts to address financial vulnerabilities, ensuring sustained growth. Academicians and researchers must delve into the sector's financial dynamics to inform evidence-based solutions and decision-making.