Probability of Default, Accountability, Bankruptcy, and Digitization Amid COVID-19 Pandemic

Abstract

The emergence of COVID-19 has impacted negatively on lives and businesses globally in such a way that businesses find it difficult to operate at optimum level which may result in their inability to perform their financial obligations to creditors. The study aims at estimating the probability of default and bankruptcy amid the COVID-19 pandemic. In this study, a simulation was carried out based on uniform distribution, and the probability of default of an organization was obtained based on well-defined parameters. The study also helps to identify if an organization is in distress, Grey, or safe zone using Altman Z-score. A real-life data of Lafarge Africa, manufacturers of cement products were used to compute Altman Z-scores using two consecutive quarters, three months ending December 2019, and three months ending March 2020. This study showed that a company’s performance can be measured on a quarterly basis, and also revealed that there is no likelihood that the company considered in this study will experience bankruptcy in the next two years. This study has shown the need for business organizations to deploy digitization tools to adequately guide against insolvency which may lead to bankruptcy.

Appendix

6.1.1 A1. Three Months, 2019 Ended December 31 Computed with Naira Value (‘000)

$$\begin{aligned} X1 = &\,\, Working \,\,Capital/Total\,\, Assets \\ = &\,\, \left( {Total \,\,Current \,\,Assets - Total \,\,Current\,\, Liabilities} \right)/Total \,\,Assets \\ = &\,\, \left( {75045721 - 84411770} \right)/497152208 = - 0.011884 \\ \end{aligned}$$

$$\begin{aligned} X2 = &\,\, Retained\,\, Earnings/Total \,\,Assets \\ = &\,\, 155801325/497152208 \\ = &\,\, 0.31338 \\ \end{aligned}$$

$$\begin{aligned} X3 = &\,\, Earnings \,\,Before \,\,Interest \,\,and \,\,Taxes/Total\,\, Assets \\ = &\,\, EBIT/Total \,\,Assets \\ = &\,\, 34910000/497152208 \\ = &\,\, 0.070219944 \\ \end{aligned}$$

$$\begin{aligned} X4 = &\,\, Market\,\, Value\,\, Equity/Book\,\, Value \,\,of \,\,Total \,\,Liabilities \\ = &\,\, Market \,\,Cap/Total \,\,Liabilities \\ = &\,\, 246449000/152238207 \\ = &\,\, 1.6188380 \\ \end{aligned}$$

$$\begin{aligned} X4^\prime = &\,\, Market\,\, Value\,\, Equity/Book\,\, Value\,\, of\,\, debt \\ X4^\prime = &\,\, 246449000/266{,}207{,}059 \\ = &\,\, 0.925779357 \\ \end{aligned}$$

$$\begin{aligned} X5 = &\,\, Revenue/Total \,\,Assets \\ = &\,\, 213000000/497152208 \\ = &\,\, 0.428440217 \\ \end{aligned}$$

$$\begin{aligned} Z = &\,\, 1.2* - 0.01188 + 1.4*0.31338 + 3.3*0.07021 \\&+ 0.6*1.618838036 + 1.0*0.42844 \\ = &\,\, 2.05591 \\ \end{aligned}$$

$$\begin{aligned} {{Z}^\prime} =&\,\, 0.717* - 0.01188 + 0.847*0.31338 + 3.107*0.07021 \\&+ 0.420*0.92580 + 0.998*0.42844 \hfill \\ =&\,\, 1.2914764 \hfill \\ \end{aligned}$$

6.1.2 A2. Three Months, 2020 Ended March 30 Computed with Naira Value (‘000)

$$\begin{aligned} X1 = &\,\, Working \,\,Capital/Total \,\,Assets \\ = &\,\, \left( {Total\,\, Current \,\,Assets - Total\,\, Current\,\, Liabilities} \right)/Total \,\,Assets \\ = &\,\, \left( {70{,}964{,}377 - 77{,}404{,}263} \right)/ 491{,}813{,}770 \\ = &\,\, - 0.013094156 \\ \end{aligned}$$

$$\begin{aligned} X2 = &\,\, 163{,}868{,}214/491{,}813{,}770 \\ = &\,\, 0.333191594 \\ \end{aligned}$$

$$\begin{aligned} X3 = &\,\, Earnings \,\,Before\,\, Interest\,\, and\,\, Taxes/Total \,\,Assets \\ = &\,\, EBIT/Total \,\,Assets \\ = &\,\, 169000000/491{,}813{,}770 \\ = &\,\, 0.343626003 \\ \end{aligned}$$

$$\begin{gathered} X4 = Market \,\,Value \,\,Equity/Book \,\,Value\,\, of\,\, Total \,\,Liabilities \hfill \\ = Market \,\,Cap/Total \,\,Liabilities \hfill \\ = 169{,}131{,}852/138{,}832{,}880 \hfill \\ = 1.218240607 \hfill \\ \end{gathered}$$

$$\begin{aligned} X4^\prime = &\,\, Market \,\,Value \,\,Equity/Book \,\,Value \,\,of\,\, debt \\ X4^\prime = &\,\, 246449000/60064499 \\ = &\,\, 4.103072 \\ \end{aligned}$$

$$\begin{aligned} X5 = &\,\, Revenue/Total\,\, Assets \\ = &\,\, 63{,}695{,}766/491{,}813{,}770 \\ = &\,\, 0.129511961 \\ \end{aligned}$$

$$\begin{aligned} Z = &\,\, 1.2*\left( { - 0.013094} \right) + 1.4*\left( {0.33319} \right) + 3.3*\left( {0.34362} \right) \\&+ 0.6\left( {1.21824} \right) + 1.0*\left( {0.12951} \right) \\ = &\,\, 2.44515 \\ \end{aligned}$$

$$\begin{aligned} {{Z}^\prime} = &\,\, 0.717* - 0.013094 + 0.847*0.33319 + 3.107*0.34362 \\&+ 0.420*5.103072 + 0.996*0.12951 \\ = &\,\, 3.612733072 \\ \end{aligned}$$