Default Risk

I.Defination :

Default risk is the event in which companies or individuals will be unable to make the
required payments on their debt obligations.

II.Source :

Z score was created by Edward I.Altman (1968), New York university , based on the
research on the different number of other companies in American.

III. Caculation Method :

Z-score consist of 5 scales : X1, X2,X3,X4,X5

X1 = Working Capital / Total Assets

- Working capital = short term assets – short term debt

- The loss within the business activities will be reduce the X1 rate

X2 = Retain Earning / Total Assets

- This scale measure Retain Earning in years

- The development of the company has been evaluated through this number

X3= EBIT / Total Assets

X4 = Market value of equity/Total liabilities

X5= Sales/Total Asset

IV. Evaluating Bibica :

Because Bibica is a equitized company so we applied the formula :

Z = 1.2*X1 + 1.4*X2 +3.3*X3+ 0.64*X4+ 1.00*X5

Year X1 X2 X3 X4 X5 Z score
2017 0.7 0.05 0.1 2.44 1.13 3.84
2016 0.73 0.05 0.1 3.79 1.26 4.82
2015 0.68 0.06 0.1 3.81 1.31 4.82

Through the use of the model score Z , We can see that :

In 3 years , Z always better than 2.99 , so Bibica company is located in safe areas, not in
danger of bankruptcy.In 2015, Z=4.82 we can see that the financial situation of company
was very good. X4 = 3..81 , this figure proves that the customers trusted in Bibica company.
In the next year, Z=4.82 the financial situation was still positive thank to X1, X1= 0.73 (2016)
> X1= 0.68(2015) , it proves Bibica Co did not losses in 2016.In 2017, Z= 3.84 and X4 and
X5 decreased through the years , especially in 2017. The market value of equity sharly
increase and the liability was also. In additon, they investment in assets through the years
but the Sale was not increase considerably. In conclusion , the default risk of Bibica in 2015-
2017 was not worrying .

V. Compare with HaihaCo :

BibicaCo:

Year X1 X2 X3 X4 X5 Z score
2017 0.7 0.05 0.1 2.44 1.13 3.84
2016 0.73 0.05 0.1 3.79 1.26 4.82
2015 0.68 0.06 0.1 3.81 1.31 4.82

HaiHaCo

Years X1 X2 X3 X4 X5 Z-score
2017 0.28 0.01 0.09 1.57 2.03 3.62
2016 0.37 0.02 0.08 1.78 1.64 3.46
2015 0.15 0.07 0.08 4.11 1.68 4.70

As we can see in 2 tables , Z score of 2 companies are always better than 2.99 and not in
the warning area. In 2016 , the finacial situation of HaiHaCo had sign of strong secline (
Z=4,7->3.46) , while Bibica was still stable (Z=4.82 ) . In 3 years , X2 scale of HaiHaCo was
decrease sharply , it means the retain earning is also, so in 2016 and 2017 they sold the
assets , in other way , Bibica invested to assets in this 2 years. Therefore , 2 companies had
different strategy in 2017 , and the development of Bibica was greater than HaiHaCo. In
addition , X5 scale of HaiHaCo in 2017 speeded up abnormally because they sold the asset
and Bibica purchase more. To sum up , through 2015-2017 , the indexs on each scale of
Bibica was more stable than HaiHaCo , it means HaiHaco’s credit risk was larger than that of
BiBica.