A STUDY ON ALTMAN Z-SCORE FOR PREDICTING FINANCIAL DISTRESS IN PUBLIC SECTOR UNDERTAKINGS (PSUS)

Abstract

Public Sector Undertakings (PSUs) play a vital role in the Indian economy by contributing to industrial growth, employment generation, and infrastructure development. However, many PSUs face financial challenges due to inefficiencies, competitive pressures, and policy shifts. To ensure their sustainability and efficient resource utilization, it is essential to regularly assess their financial health. This study applies the Altman Z-Score model as a tool to predict potential financial distress in selected Indian PSUs and to evaluate their risk of bankruptcy or insolvency. The Altman Z-Score model, developed by Edward Altman, is a widely accepted financial analysis tool that uses a combination of five financial ratios to determine the likelihood of business failure. While originally designed for manufacturing firms, the model has been adapted and applied across various industries, including the public sector. In this research, the modified Z-Score model suitable for non-manufacturing and emerging market companies is used to analyze financial data from a sample of PSUs over a five-year period (2020–2024). The study categorizes each PSU into one of three zones—safe, grey, or distress—based on their calculated Z-Scores. The results indicate that while several PSUs are financially stable and fall into the safe zone, a significant number operate within the grey or distress zones. PSUs in sectors such as telecommunications and heavy industries show weaker financial health compared to those in energy and infrastructure. This analysis highlights the growing need for financial restructuring, operational reforms, and improved governance within PSUs. It also emphasizes the usefulness of the Altman Z-Score model as a proactive tool for early detection of financial weakness, though it should be complemented with qualitative assessments given the unique nature of government-owned enterprises. In conclusion, this study demonstrates that the Altman Z-Score can serve as a valuable indicator for predicting financial distress in PSUs, helping policymakers and managers take timely corrective measures to ensure long-term sustainability.