RATIONALITIES OF Z-CATEGORY SHARES IN DHAKA STOCK EXCHANGE: ARE THEY IN FINANCIAL DISTRESS RISK?

ABSTRACT

Financial distress is a situation where a firms operating cash flows are not sufficient to satisfycurrent obligations and the firm is forced to take corrective actions, and a firm in financial distressmay also face bankruptcy or liquidation to meet its liabilities. Financial distress can be caused bylosses, dividend reduction or bankruptcy. A good way to measure the possibility of bankruptcy is touse Z score model (Altman, 1968). This paper uses the Z score model to predict risk of financialdistress of Z category companies listed in Dhaka Stock Exchange (DSE). Results suggest that fiveof fifty three companies are out of danger while seven of those are in the gray area. Evidently, fortyone of the companies are operating with high distress risk as suggested by the model result.Therefore ninety percent of the companies are suffering from financial distress risk due to very poor management capability and operating inefficiency although its reflection to the stock price is absentfrom the market in many instances. The Altmans Z score, model though may not be fullyapplicable for companies in Bangladesh, yet proves its strong validity and correctness in predictingdistressful status of the Z category companies.

Keywords:
financial distress, Altman Z score, bankruptcy prediction, discriminant analysis, Zcategory shares, company failure

INTRODUCTION
Financial distress is a condition when a companycannot meet, or has difficulty to pay off, itsfinancial obligations to its creditors. The chance of financial distress increases when a firm has highfixed costs, illiquid assets, or revenues that aresensitive to economic downturns. Financial distressis a term in Corporate Finance used to indicate acondition when promises to creditors of a companyare broken or honored with difficulty. Sometimesfinancial distress can lead to bankruptcy. Financialdistress is usually associated with some costs to thecompany and these are known as Costs of FinancialDistress.A common example of a cost of financial distressis bankruptcy costs. These direct costs includeauditors' fees, legal fees, management fees andother payments. But cost of financial distress can occur even if bankruptcy is avoided (indirectcosts).Financial distress in companies can lead to problems that can reduce the efficiency of management: As maximizing firm value andmaximizing shareholder value cease to beequivalent managers who are responsible toshareholders might try to transfer value fromcreditors to shareholders.The result is a conflict of interest between bondholders (creditors) and shareholders. As afirms liquidation value slips below its debt, it isthe shareholder's interest for the company to investin risky projects which increase the probability of the firms value to rise over debt. Risky projectsare not in the interest of creditors as they increasethe probability of minimizing the firms value.Since these projects do not necessarily have a positive net present value costs may arise from lost profits.Equally, management might choose to prolong bankruptcy, which has the same effect on probabilities of a change in the firms value.Management might also distribute high dividendsto "save" money from the creditors. Another sourceof indirect costs of financial distress is higher costsof capital: Short-term loans by contractors and banks will be expensive and hard if not impossibleto get.The incidence of business failure in the world isincreasing. Statistics

show that more than 300companies go out of business every week (Business Failure record, Business Week, Jan2009). The high rate of bankruptcy is attributed tothe combined effect of fiercer competition in themarketplace and heavier debt burdens carried bycompanies. Matters grow even worse when thesetwo factors are accompanied by an economicdownturn. A company's chances of survival can be predicted with the use of financial-statementanalysis. Any single one of the 20 or soacknowledged financial ratios cannot adequatelyevaluate the overall strength of a company,although each of them can be extremely useful inidentifying specific strengths and weaknesses thatcontribute to the general financial health of thefirm One of the most commonly used statistical ratiomodels for predicting business collapse isAltman's Z score.This model has proven to be a reliable toolfor bankruptcy forecasting in a wide variety of contexts and markets. However, it should be notedthat the Z score does not apply to every situation. Itcan only be used for forecasting if the company being analyzed can be compared to the database.The Z-score formula for predicting bankruptcy wasdeveloped in 1968 by Edward I. Altman, a financial economist and professor at the Leonard N. Stern School of Business at New York University.The Z-score is a multivariate formulafor a measurement of the financial health of acompany and a powerful diagnostic tool thatforecasts the probability of a company entering bankruptcy within a 2 year period. Financial-statement analysis looks at a firm's past performance to predict its future condition. Someusers of ratio information have very specific concerns. Lenders are interested in the firm's ability to meet the payments over the life of the loan.Auditors are interested in judging whether financially troubled companies are likely tocontinue as a going concern.Managements areinterested in knowing the problems they are aboutto face and, where appropriate, taking correctiveaction.Statistical ratio based models are usually created byacademics. They often are develo.

Objective
Identify a sample of failing firms. These wouldmeet some predetermined criterion of failuresuch as bankruptcy, loan defaults, etc. Asample of around 30 is probably needed for results to have statistical validity. Find a group of comparable firms. Thesewould be similar with respect to size, industry,etc. The only difference is these businesses arein a

healthy state. Analyze differences between healthy andfailing businesses. Computer analysis shouldreveal which ratios are consistently andsignificantly different between the two groups. Derive a scoring system containing thesignificant ratios. This usually takes the formof a score such that score = ratio #1 * weightattached to ratio #1 +ratio #2 * weight attachedto ratio #2 etc. The model would tell whether any given firm has a profile that more closely corresponds to other successful or failing businesses. This paper appliesZ score model to the Z category shares traded inDSE to judge financial distress risk of each share.There are several categories of stocks in the capitalmarket of Bangladesh. The categories have beenmade based on several factors; they are - holdingannual general meetings and percentage of declareddividends. Among them Dhaka Stock Exchangehas following categories. A-category companies : Companies which areregular in holding the current annual generalmeetings and have declared dividend at the rate of ten percent or more in the last English calendar year will be categorized in A category companies. B-category companies : Companies which areregular in holding the annual general meetings buthave failed to declare dividend at least at the rate of ten percent in the last English calendar year will becategorized in B category companies.In case of the newly listed securities, the rate of earning per share (EPS) based on the auditedaccounts of a full year of twelve months, ascontained in the prospectus of the concernedcompanies, shall be treated as substitute of the rateof dividend applicable for A and B category of companies if no dividend were declared by suchcompanies in the last English calendar year: G-category companies: Greenfield companies. N-category compani es (Dated: July 03, 2006): Allnewly listed companies except Greenfieldcompanies will be placed in this category and their settlement system would be like B-categorycoZ-category companies:Companies which have failed to hold the current annual general meetings or have failed to declare any dividend or which arenot in operation continuously for more than sixmonths or whose accumulated loss after adjustment of revenue reserve, if any,is negative

and exceeded its paid up capital is known as Z categorycompanies.It is provided that the chief executive officer (CEO)of the exchange may bring any other companyunder this category, if deemed necessary, with the prior written consent from the Commission:Provided further that the words, or whoseaccumulated loss after adjustment of revenuereserve, if any, is negative and exceeded its paid upcapital shall not be applicable for the companieswhich have declared dividend out of the current profits in the last English calendar year and heldannual general meeting(s) relating to alloutstanding financial year(s) despite having suchaccumulated loss exceeding the paid up capital.mpanies. The definition of the Z category companies showsthe justification for doing Z score calculation itself.The definition suggests that Z category companieshave following characteristics: Failed to hold the current annual generalmeetings Failed to declare any dividend Not in operation continuously for more thansix months Accumulated loss after adjustment of revenuereserve and if any is negative and exceeded its paid up capitalThese distinctiveness shows that these companiesare in very bad shape and can not even continue itsday to day operations because of their financial or managerial inefficiency. So the probabilities for bankruptcy for these companies are very high.Thats why this paper is calculating the Z score tohave an idea of the companies and predicting whatmight happen in future. This is particularlyimportant for those investors who are planning or already investing in Z category companies of Dhaka Stock Exchange.

LITERATURE REVIEW &

backround stady

For a number of years, there was considerableresearch by accountants and finance people tryingto find a business ratio that would serve as the sole predictor of corporate bankruptcy. William Beaver conducted a very comprehensive study using avariety of financial ratios (1966). His conclusionwas that the cash flow to debt ratio was the single best predictor (Chuvakhin & Gertmenian, 2003). Beavers univariate analysis led the way to amultivariate analysis by Edward Altman, who usedmultiple discriminant analysis (MDA) in his effortto find a bankruptcy prediction model. He selected33 publicly-traded

manufacturing bankruptcompanies between 1946 and 1965 and matchedthem to 33 firms on a random basis for a stratifiedsample (assets and industry). The results of theMDA exercise yielded an equation; he called the Z-score that correctly classified 94% of the bankruptcompanies and 97% of the non-bankruptcompanies one year prior to bankruptcy. These percentages dropped when trying to predict bankruptcy two or more years before it occurred.The Z-score model has been extended to include privately-held companies (Z- model) and privately-held non-manufacturing firms (Z-model) (Chuvakhin & Gertmenian, 2003).In the year 2000 in July, Edward I Altman, in his paper, while predicting Financial Distress Of Companies: Revisiting the two venerable modelsfor assessing the distress of industrial corporations.These are the so-called Z score model (1968) andZETA (1977) credit risk model. Both models arestill being used by practitioners throughout theworld. The latter is a proprietary model for subscribers to ZETA Services, Inc. (Hoboken, NJ).The study was extended in order for the tests andfindings to include application to firms not traded publicly, to non-manufacturing entities, and alsorefer to a new bond-rating equivalent model for emerging markets corporate bonds. The findingwas the ZETA model for assessing bankruptcy risk of corporations demonstrates improved accuracyover existing failure classification model (Z-Score).Jonah Aiyabei, a lecturer in the Department of Commerce at the Catholic University of EasternAfrica, wrote a paper on Financial Distress:Theory, Measurement & Consequence, which wasa seminar paper presented at the CatholicUniversity of Eastern Africa, Department of Commerce on 10 the November 2000. He stresses onthe fact that prediction and analysis of corporatefinancial performance is a crucial phenomenon in adeveloping country like Kenya in the light of recentclosure of businesses such as banks and insurancecompanies. The paper discusses the financial performance based on the financial life cycle,explores the signs of financial distress, andaddresses the issue of how firms deal with financialdistress and present a model of measuring financialdistress. It fully acknowledges the merit of using Zscore model. It recognizes that Altman's model as ameasure is a critical input to companies in Kenya.Firms can know ahead of time when they are 'sick and when 'healthy'. It also admits that it isnecessary for stakeholders to have knowledge of the Z score. This will assist them in makingdecisions pertaining to an organization. Fundlenders for example need to assess the Z scoremeasure before committing finances.In 2007 Bum J. Kim ,Department of Finance,Hallym University,Chuncheon, Kangwon,

Koreahad published a paper for APRIA annual meetingwhere his topic of the paper was BankruptcyPrediction: Book value or Market Value?. The paper investigates the robustness of Altmans Z-score model. Three aspects of predictability of theZ-score model are tested first, the significance of the model in terms of the prediction horizon,second, the significance of the Z-score model from1996 to 2000 and lastly the significance of themodel for individual industries. The findings were;first, Altmans Z-score model may have partiallylost its significance as a bankruptcy predictionmeasure on two grounds: it is losing its prediction power for long-term prediction, and its accuracy isdeteriorating for recent years data. Secondly, for years between 1996 and 2000, all variables inAltmans Z-score model do not always explain the bankruptcy of firms in three industries, namelymanufacturing, trading and service. Finally, it wasfound that the measure is applicable only to acertain industry, such as manufacturing and retailtrade, however, not for service industry. Thus, the possibility of modification of the measure remains promising but challenging.Recently, in April 2008, John R Grabski, the CEOof ClearMomentum, Inc., a financial analytics andcorporate performance management softwarecompany and an MBA in Finance and Accountingwith the honor of distinction from the University of Liverpool, in his discussion article called TheDynamic ZScore suggests that the time testedAltman Z -score, originally designed to predictcorporate default represents considerable valuewhen used as a corporate performance metric if measured continuously as opposed to one momentin time. This article argues that the Z -score should be considered more often in the corporate performance management setting. In addition, thearticle highlights the significance of the measurewhen crafting loan covenants to compliment other measures that are perhaps shorter term in nature. Ageneric framework is provided that illustrates therelationship of underlying drivers that contribute to the score, representing at least one approach tomanaging firm viability as a component of corporate strategy.In the article called Financial Market Imperfectionand Precautionary Overinvestment, by ChristianCalms, Dpartement des sciences administrative,Universit du Qubec en Outaouais, France, theauthor discusses firms' investment decisions in thecontext of financial market imperfection. Theauthor used panel data to assess the investment-cash flow sensitivity of nonfinancial firms as afunction of their degree of financial health. Thesplitting criterion used to categorize firms is afinancial stress

indicator, the Z-score, which is acontemporaneous indicator inversely related tofirms' probability of financial failure. Based on thiscriterion, empirical evidence suggests that the mostinvestment-cash-flowsensitive firms are thefinancially constrained ones. More importantly, thearticle shows that, in this class of firms, investmentseems to be partly driven by a speculative precautionary motive stemming from financialmarket imperfection

Rationalities of Z-Category Shares in Dhaka Stock Exchange

One other aspect was studied by Joseph CalandroJr. in his paper called Considering the Utility of Altman Z Score as a Strategic Assessment andPerformance Management Tool published in theJournal Strategy and Leadership in the year 2007,Vol. 35, Issue 5, Pg 37-43. The purpose of thisarticle was to provide commentary on the utility of Altman's Zscore as a strategic assessment and performance management tool. It was found that Z-score does assist as a strategic assessment and performance measurement tool.In Australia, KordaMentha Research Institute,came up with an article Predicting CorporateFailure Bench Testing Z score in its publication706 in March 2007. The article says that researchsupports the use of Altmans Z-Score as a means of detecting financial distress in Australia, albeit thelevel of accuracy was well below that observed byAltman in his original study. It was concluded thatAltman limited his study to a sample carefullyselected by size and industry whereas the author tested all failed firms regardless of size or industrydue to the limited availability of data. Moreover, itwas found that while the Z-Score provedinformative, its output is less than perfect. In somecases the financial wellbeing was moderatelyoverstated while in other cases the model failed torecognize financial distress at all.Many of the research works have been conducted,over the period to evaluate the financial position of the company with the help of the various ratios or by applying the Multiple Discriminant Analysis to predict the corporate failure. L.C Gupta (1999)attempted a refinement of

Beavers method withobjective of predicting the business failure.Whereas Mansur. A.Mulla (2002) made a study inTextile mill with the help of Z score model for evaluating the financial health with five weightedfinancial ratios and followed by Selvam M, andothers (2004) had revealed about Cementindustrys financial health with special reference toIndia Cements Limited. Bagchi S.K (2004)analyzed about practical implication of accountingratios in risk evaluation and concluded thataccounting ratios are still dominant factors in thematter of credit risk evaluation.Krishna Chaitanya (2005) used Z model to measurethe financial distress of IDBI and concluded thatIDBI is likely to become insolvent in the years tocome. From the above reviews, the researcher identified the research gap which could be dealt in this study. It was also found that Z-Score can besignificant tool used in turnaround management for diagnosing and evaluating overall financialcorporate health, as well as the viability of turnaroundor restructuring efforts. This was published by Armand Lucarelli, the ManagingDirector, Capital Restoration LLC, in March 11,2003 in the article Using the Z-Score as aTurnaround Tool. It is useful in CorporateGovernance, Credit Evaluation, Private Investment,and Insurance Underwriting.In summary, Z score is a timely model that canapply for predicting financial distress of bothmanufacturing and non-manufacturing firms. Thismodel is applied in this paper with an objective toknow the financial attributes of Z categorycompanies traded in DSE and determined their likelihood of bankruptcy.

METHODOLOGY
This paper uses secondary information collectedfrom Balance Sheet Analysis published by theBangladesh Bank. The paper is also used basic datarelated to the income statement and market price of all the listed companies from the Dhaka Stock Exchange. Much other information about differentcategories of stocks has been collected from thewebsite of DSE.However, there are several limitations of this paper. First of all it works with the data from theyear 2000 to 2005, considering this fact data are pretty old. Predictions based on this data may not be entirely true. Moreover, for couple of companiesit did not have the data for two or three years whichalso breaks the continuity of trend. Moreover, some banking and non banking financial institutionswhich fall under Z category are not included in this paper as the relevant data could not be

found. Nonetheless, the paper uses 53 companies data tocalculate Altman Z scores to predict the probabilityof financial distress. These companies are selected based on two criterion; first, companies whose became public limited and enlisted in DSE before2003 and second, at least had two years of fullydisclosed public information before 2005.Studies measuring the effectiveness of the Z-scorehave shown the model to be accurate with morethan 70% reliability. The Z-score combines four or five common business ratios using a weightingsystem calculated by Altman to determine the likelihood of bankruptcy. The weighting systemwas originally based on data from publicly heldmanufacturers, but has since been modified for private manufacturing, non-manufacturing andservice companies.

The original data sample consisted of 66 firms, half of which had filed for bankruptcy under Chapter 7.All businesses in the database were manufacturersand small firms with assets of less than $1millionwere eliminated.

The Z-Score bankruptcy predictor combines fivecommon business ratios, using a weighting systemcalculated by Altman to determine the likelihood of a company going bankrupt. The given formulaapplicable for publicly traded manufacturing firm. AssetsTotal Earningstained d Accumulate Debt of Value Book Equityof ValueMarket AssetsTotal Sales AssetsTotal Capital Working Net AssestsTotal EBIT Z Re4.16.00.1 2.13.3+++++ If the score is 3.0 or above - bankruptcy is notlikely. If the Score is 1.8 or less - bankruptcy islikely. A score between 1.8 and 3.0 is the gray area.Probabilities of bankruptcy within the above rangesare 95% for one year and 70% within two years.Obviously, a higher score is desirableInterpretations of those different ratios are stated below: Working Capital/ Total Assets: This measures

liquid assets in relation to the firm's size. Altman,interestingly, mentions that the most widely usedcurrent and acid ratios were not as good predictorsas this measure. Retained Earnings/Total Assets: This ratio is ameasure of cumulative profitability that reflects thefirm's age as well as earning power.Many studieshave shown failure rates to be closely related to theage of the business. Earnings before Income Taxes/Total Assets: This isa measure of operating efficiency separated fromany leverage effects.It recognizes operatingearnings as a key to long-run viability. Market Value of Equity/Book Value of Debt : Thisratio adds a market dimension. Academic studies of stock markets suggest that security price changesmay foreshadow upcoming problems. Sales/Total Assets: This is a standard turnover measure. Unfortunately, it varies greatly from oneindustry to another.Altman's Z score is the tried and tested formula for bankruptcy prediction. It has been demonstrated to be quite reliable in a variety of contexts andcountries. It is not designed to be used in everysituation. Before using a Z score to make predictions, one must ensure the firm beingexamined is comparable to the database. If a firm's stock is not publicly traded, the termMarket Value of Equity/Book Value of Debtcannot be calculated. Moreover for nonmanufacturing firmsSales/Total Assets ratio is believed to varysignificantly by industry. It is likely to behigher for merchandising and service firmsthan for manufacturers, since the former istypically less capital intensive. Consequently,nonmanufacturers would have significantlyhigher asset turnover and Z scores. The modelis thus likely to underpredict certain sorts of bankruptcy. To correct for this potentialdefect, Altman recommends the following

If the score is 2.90 or above - bankruptcy is notlikely. If the Score is 1.23 or less - bankruptcy islikely.

 A score between 1.23 and 2.90 is the grayarea.For this study, paper uses the formula which isapplicable for publicly traded and manufacturingfirms because the companies those have beenselected to analyzed, their shares are publiclytraded and most of them are also manufacturingorganizations.

Rationalities of Z-Category Shares in Dhaka Stock Exchange

EVALUATIONS AND ANALYSIS

The calculated result of distress risk is given inTable-1. In this table year to year Z-scores are also presented. The paper is trying to rank the zcategory shares (presented in Table-2) based ontheir individual average Z-scores, which are shownin the last column of Table-1. Surprisingly onlyfive companies are out of financial distress risk according to their respective average Z-score.Where Z-scores are higher than 3, the scores between 1.8 to 3 is the gray area and sevencompanies are fallen in this area. Altman explainthat companies having scores in gray area aredifficult to predict about their possible distress risk.Because empirical results show that manycompanies of this area are successfully coming back from bankruptcy risk and many of themunfortunately trapped down into it for number of years and then become liquidated.The average Z-scores (Table-1) refer that forty onecompanies are now in financial distress risk withscores less than 1.8 even many firms have negativescores. Now the paper is looking into thefundamental analysis of each group of companysfrom nonbankrupt to bankrupt. Paper will further investigate their financial and performance ratioson which Z score is dependent. This investigationwill help to make suggestions for the capital marketinvestors and will guide the other companies bysetting a demarcation line. Rose Heven Ball Pen: The average Z value rank Rose Heven Ball Pen as number one with a scoreof 33.61. This is far above the distress risk line.The performance of Rose Heven augmented withmarket value of equity to book value of debt ratio.Considering year to year analysis of this companyit is found that it did best in 2001. The reason wasthat the sales increased

significantly in this period.But they could not continue the performance at thisrate in later periods. The current market price of this stock is Tk. 10.10. Modern Cement: Most unusual company in theanalysis. With an average score of 33.54 it is in thesecond position, however, this does not representthe fact for this company. Because the Z value is132.23 in 2002 above the risk line but this isinconsistent with other two years results. These are1.66 and 0.28 in 2001 and 2003 respectively andshow that the firm is in financial distress risk.Considering as outlier this paper is excluded thiscompany from the ranking list. Currently this shareis traded at Tk. 9.60 in DSE (Dhaka Stock Exchange). Dhaka Fisheries: The paper could collect onlyfour years data for Dhaka fisheries. From the trendit is seen that the firm is well above the critical lineand have few possibilities to become bankrupt innear future. However, it is facing a downward trendin Z score which is not good for the company. Theanalysis shows that the operating efficiencydeclined over time as EBIT dropped from 13 lakhto 3 lakh in 2003 which was the prime reason for their downfall. They were efficient in maintainingday to day liquidity and keeping equity about 22times higher than debt. But they retained only 3%of their earning to total asset. So in general we cansay the company is not going to face bankruptcywith one or two years but it should work on itsoperating efficiency. The average Z score was 7.52and current market price is Tk. 145. Meghna Shrimp Culture: The statistics shows thatthe company has had a mixed experience so far. In2000 they fell in gray area from where they coldgot out for the next three years. The reasonworking behind their improvement was that theyreduced the size of their balance sheet throughdownsizing the asset and debt. However, the firmwas also in the gray area in 2004 because of lower EBIT. Surprisingly the average Z score of 3.31refers that firm has no possibility of bankruptcy innear future. Moreover, the current market price of stock is Tk. 55.75 Fine food Ltd: Fine food Ltd. is an agro based firmand the paper has got data of only two years. In2001 their Z score was 3.84 which are far abovefrom the

safe or non bankrupt region. If anyonelook into the different ratios of the company in thatyear then could see that, their Market value of theshares were very high than their book value whichwas 4.17 times. Their sales turnover ratio wasgood. For the objective of future growth theyretained 22% amount of their total asset. Thoughtheir profitability and efficiency was not that muchimproved in the next year but market value of theshare was still very high. With an average Z valueof 3.02 the firm has no possibility of distress risk.However the firm must focus on strategies toincrease their profitability and efficiency level tomaintain the expectations of the shareholders andshare price. Currently the shares are traded atTk 26.80. Anwar Galvanizing: In fact for all the years, it washovering in the gray area as its Z score was between the ranges of 1.81 to 2.99. So thecompanys future is unpredictable. It could get outto non bankruptcy region or might fall to bankruptcy region in the near future. However, in2004 it came very close to the upper limit of thegray area. So it can be hope that in the next year itmay come to non bankrupt area. Mainly EBIT/totalasset and net working capital/ total asset these tworatios contributed to the lift is the Z score of thecompany. In the DSE the price of this stock is notfound. Bengal Biscuits: For the whole five years theywere in between the gray area. So it can not be saidfor sure that they will fall in to bankruptcy regionor they will get out from this situation. Their position was good in 2000 compared to other years.But in 2002 they dipped a little because of negativeEBIT, and lower accumulated retained earningscompared to total assets. But in successive yearsthey recovered by a little amount. Therefore theyshould try to bring the components up to thescratch so that they can grow out of the gray area. Niloy Cements: The Z value of Niloy Cementsfluctuates over the year after year with an averagescore of 2.57. The current market price of thisshare is Tk. 131.50. The company was in the Non bankrupt region in the year 2000 and 2002. In theyear 2001 and 2003 it was in the gray area. But themost alarming situation occurred in the year 2004when the company is in the bankrupt situation. Thereason is the shortage of net working capital andthe low volume of sales.

Gulf Food: In 2000 and 2001 the firm was in thegray area where they had the possibility of goingdown or high. But after 2002, Gulf food washeading towards in terrible position. EBIT/TotalAsset indicated the operating inefficiency and inthe year of 2003 it was lowest ever among the fiveyears. From around 7% it went down to 2% and asit has the highest weight so Z score sharply fall.For the betterment of the company, in 2003 Gulf Food higher amount of earnings and in 2004 theywere able to reach into the gray area again. Finallywe can say the possibility of bankruptcy within 1or 2 years is very much higher for Gulf Food asthey are in the border line. They should try to boostup the asset turnover and simultaneously strengthenthe operating efficiency level by increasing EBIT.Current market price of this share is Tk. 126 inDSE. Shine Pukur Holdings: Currently this stock istraded at Tk. 102.70. However,

the Z value of thiscompany was in the gray area during 2000-02,which indicates an average performance of thecompany and the rate was showing upward trend.But from 2003 the rate was started to decrease dueto the lower amount of sales and increased cost. Beach hatchery Ltd: Beach hatchery Ltd has been awell performing company that has kept it out of the bankruptcy region. However, it is not fully protected from bankruptcy. In 2003 the Z scorewas 1.88 which falls in to gray area. They werealso in this area in 2000 but they were successfullyout of this danger line in 2001. However, they fellinto the bankruptcy region with a score 1.81 due tolower asset turnover ratio and higher amount of debt. But there was an improvement in 2003. Thecurrent market price of this share is Tk. 28.9 inDSE. Aramit Cements: Based on the overall Z value thisfirm was belonging into gray area. However, thefirm did its best in the year 2000-01, where it placed in above average of demarcation line. Butgradually it seized by the bankrupt region due tothe increased cost, low sales volume and

negativeworking capital. Currently this share is traded atTk. 331 in DSE In summary this can be said that the definition of Zcategory shares made by the Dhaka Stock Exchange is perfectly harmonized with their financial fundamentals. Because most of the firmhas either lower level of asset turnover ratios or higher level of leverage, and both of theseaugmented the distress risk. In this circumstanceinvestors have to be very careful about their longterm investment decision, because thesustainability for all the selected companies isquestionable.In the following section this paper presents those Zcategory shares which were in financial distressrisk with their respective Z value. Because theaverage Z value of these shares was lower than 1.8,which is below the demarcation line. The mostinteresting fact is that many of them had negative Zvalue. However, most of these shares are stilltraded in Dhaka and Chittagong Stock Exchange.Even they are traded at a price higher than face

Rationalities of Z-Category Shares in Dhaka Stock Exchange

value. The reason might be the positive perceptionof investors; they are expecting growth of thesefirms in future. But unfortunately this is against thefundamental of investment choices. Because untilany financial restructuring these share are notsuppose to be value at its current price. However,the paper is trying to look into deep of this truth tofind and convey a rational comment for potentialinvestors.The results given in the Table - 2 shows that amongthe remaining 41 companies only ten had Z valuehigher than 1 but less than 1.88, twenty onecompanies had positive Z value and surprisinglyten firms had negative Z value.Perfume Chemical Industries (PCI) Limited withan average Z value of 1.744 was near to the safeline. Analysis has found that if PCI could increaseits sales percentage then it would be relocated ingray area within next few years. BD com online,BD thai aluminium, Altex industries ltd., Talluspinning mills, Beximco fisheries, BD welding,Samanta leather complex, Rahim food and Padmatextile, these are the other nine companies whose Zvalues are in between 1.00 to 1.59. The primereasons behind this downfall of these companieswere either lower percentage of EBIT/Total asset, Net working capital/Total Asset or Market Valueof Equity/Book Value of Debt. In most of the

casesthe market value of equity to the book value of debtincreased drastically which lead them to thiscatastrophe. However, investors of Dhaka Stock Exchange have a very persuasive attitude to theseshares. This can be easily understood from thetrading volume and price range of these shares,which are given in Table - 3. The entire polls of shares are now traded at a price higher than theface value.The most mysterious fact identified by this paper isthat there are shares traded in DSE which havenegative Z value. The meaning of negative Z valueis significantly articulated in this paper. Becausenegative Z value means either EBIT or NetWorking Capital or Accumulated RetainedEarnings is negative. Following the signalinghypothesis these shares are supposed to have lesstrading volume and low price. However, the datadoes not support it as most of the shares areregularly traded and speculators are making hugeamount of profit by creating bubble in the market.The share are Desh garments ltd., Rahmanchemical, Maq paper, Meghna condensed milk,Amam sea food, Orion infution ltd., Therapeuticsltd., Padma printers, Zeal bangla sugar andshyampur sugar mills. In the Table-3 the current prices of theses share are given.The cause behind this high degree of financialdistress risk of above mentioned shares is negativeEBIT. That means these companies were not ableto generate sufficient operating revenue to meet theexpenses. However, many of them were sufferingwith excess current liabilities over its currentassets. So these firms need to be very careful abouttheir operating efficiency. Other than this they willnot be able to sustain in the market. Furthermore,negative accumulated retained earnings wereanother reason for this downfall. But this wasaugmented by the negative net income and barrier of regular dividend declaration. Later when theyfailed to meet this requirement relocate to Zcategory.Last but not the least; twenty one companies werehaving an average Z value of 0.17 to 0.95. Therespective Z value calculation has shown that lowsales growth and operating inefficiency were thetwo most significant reasons behind this disgrace. CONCLUSION This paper investigates the financial attributes of Zcategory shares and found that ninety percent of these companies are suffering with financial problem. The financial management at their corporate level is very poor. Nonetheless,executives are not well equipped with assetmanagement skills and boards of directors are nottaking any positive initiatives those could motivatelong term investors to invest with them.Subsequently the impact of higher leverage of these firms will create a chain effect that

could leadto financial distress both for the firm and lender institutions. The management of these firms is notcaptivating any steps to bust sales or cut cost or increase asset turnover or accumulate internalfunds to reduce higher dependency on externalfunds. All these augmented the possibility of brankruptcy for Z category shares over the years.So the paper can make confident comment that thecentral authority of Bangladesh capital marketSecurity Exchange Commission (SEC) has to takeinventiveness to classify those firms which are nottruly in business and force active firms toreorganize the capital structure.

CONCLUSION
This paper investigates the financial attributes of Zcategory shares and found that ninety percent of these companies are suffering with financial problem. The financial management at their corporate level is very poor. Nonetheless,executives are not well equipped with assetmanagement skills and boards of directors are nottaking any positive initiatives those could motivatelong term investors to invest with them.Subsequently the impact of higher leverage of these firms will create a chain effect that could leadto financial distress both for the firm and lender institutions. The management of these firms is notcaptivating any steps to bust sales or cut cost or increase asset turnover or accumulate internalfunds to reduce higher dependency on externalfunds. All these augmented the possibility of brankruptcy for Z category shares over the years.So the paper can make confident comment that thecentral authority of Bangladesh capital marketSecurity Exchange Commission (SEC) has to takeinventiveness to classify those firms which are nottruly in business and force active firms toreorganize the capital structure. Even SEC can