Ratio between current assets and total assets

Oct 13, 2025 by recoveryshake.com 109 views

Introduction

Assessing the possibility of bankruptcy of a company is a crucial aspect in the financial world, particularly for investors and stakeholders. In this context, the Altman Z Score method has emerged as an effective tool for evaluating a company's financial health. This research focuses on manufacturing companies in the consumer goods sector listed on the Indonesia Stock Exchange from 2018 to 2020. The data used in this study are secondary data that can be accessed through the official website of the Indonesia Stock Exchange (www.idx.co.id). The population in this study consisted of 63 companies, and using the purposive sampling method, 32 companies were selected analyzed during the three observation periods (2018-2020), with a total of 96 observations.

The Altman Z Score Method

The Altman Z Score method, developed by Edward I. Altman in 1968, measures the tendency of bankruptcy by using several financial variables. These variables include:

Ratio between current assets and total assets: This ratio indicates the company's ability to meet its short-term obligations.
Retained earnings to total assets: This ratio shows the company's ability to generate profits and retain them.
Market value of equity to total liabilities: This ratio indicates the company's ability to meet its long-term obligations.
Sales ratios to total assets: This ratio shows the company's ability to generate sales and revenue.
Working capital ratios to total assets: This ratio indicates the company's ability to manage its working capital.

Each of these variables contributes to the final calculation of the Z score, which is then categorized into three groups:

Healthy company: A company with a Z score above 2.99 is considered healthy.
Company in the gray zone (gray area): A company with a Z score between 1.81 and 2.99 is considered to be in the gray zone.
Bankruptcy company: A company with a Z score below 1.81 is considered to be at risk of bankruptcy.

Results

The results of this study showed that in 2018, there were 19 healthy companies, 6 companies in the gray zone, and 7 companies with bankruptcy. In 2019, the number of healthy companies decreased to 18, with 6 companies in the gray zone and 8 companies bankrupt. 2020 showed an increasingly worrying trend with 18 healthy companies, 5 companies in the gray zone, and 9 companies at risk of bankruptcy. Interestingly, there are 15 companies that have succeeded in maintaining healthy financial conditions for three years in a row.

Discussion

The results analysis provides a clear picture of the stability and financial resilience of companies in the consumer goods sector. The trend of increasing the number of companies at risk of bankruptcy shows the challenges faced by this sector, especially in the midst of uncertain economic conditions due to Pandemi Covid-19. This shows the importance of company management to always monitor financial conditions and take strategic steps to keep the company in the healthy category.

Conclusion

With a deeper understanding of the Altman Z Score method and the results of this study, investors and other stakeholders can make better decisions related to investment and risk management. This research is also an important basis for further studies, both in the same sector and other sectors, to better understand the factors that influence the possibility of bankruptcy of the company. The existence of more transparent and accurate information will be very useful in creating a healthier and sustainable market ecosystem.

Recommendations

Based on the results of this study, the following recommendations can be made:

Company management: Company management should always monitor financial conditions and take strategic steps to keep the company in the healthy category.
Investors and stakeholders: Investors and stakeholders should make better decisions related to investment and risk management based on the Altman Z Score method.
Further studies: Further studies should be conducted to better understand the factors that influence the possibility of bankruptcy of the company.

Limitations

This study has several limitations, including:

Secondary data: The data used in this study are secondary data that may not be accurate or up-to-date.
Purposive sampling method: The purposive sampling method used in this study may not be representative of the entire population.
Limited scope: This study only focuses on manufacturing companies in the consumer goods sector listed on the Indonesia Stock Exchange from 2018 to 2020.

Future Research Directions

Based on the results of this study, the following future research directions can be suggested:

Application of the Altman Z Score method in other sectors: The Altman Z Score method can be applied to other sectors, such as the service sector or the agricultural sector.
Development of a new bankruptcy prediction model: A new bankruptcy prediction model can be developed based on the results of this study.
Investigation of the factors that influence the possibility of bankruptcy: Further studies can be conducted to investigate the factors that influence the possibility of bankruptcy of the company.
Frequently Asked Questions (FAQs) about the Assessment of the Possibility of Bankruptcy Company using the Altman Z Score Method =====================================================================================

Q: What is the Altman Z Score method?

A: The Altman Z Score method is a financial model developed by Edward I. Altman in 1968 to predict the likelihood of a company's bankruptcy. It uses five financial variables to calculate a Z score, which is then categorized into three groups: healthy company, company in the gray zone, and bankruptcy company.

Q: What are the five financial variables used in the Altman Z Score method?

A: The five financial variables used in the Altman Z Score method are:

Ratio between current assets and total assets: This ratio indicates the company's ability to meet its short-term obligations.
Retained earnings to total assets: This ratio shows the company's ability to generate profits and retain them.
Market value of equity to total liabilities: This ratio indicates the company's ability to meet its long-term obligations.
Sales ratios to total assets: This ratio shows the company's ability to generate sales and revenue.
Working capital ratios to total assets: This ratio indicates the company's ability to manage its working capital.

Q: How is the Z score calculated?

A: The Z score is calculated by using the following formula:

Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 0.99X5

Where X1, X2, X3, X4, and X5 are the five financial variables mentioned above.

Q: What are the three categories of the Z score?

A: The three categories of the Z score are:

Healthy company: A company with a Z score above 2.99 is considered healthy.
Company in the gray zone (gray area): A company with a Z score between 1.81 and 2.99 is considered to be in the gray zone.
Bankruptcy company: A company with a Z score below 1.81 is considered to be at risk of bankruptcy.

Q: What are the limitations of the Altman Z Score method?

A: The Altman Z Score method has several limitations, including:

Secondary data: The data used in this study are secondary data that may not be accurate or up-to-date.
Purposive sampling method: The purposive sampling method used in this study may not be representative of the entire population.
Limited scope: This study only focuses on manufacturing companies in the consumer goods sector listed on the Indonesia Stock Exchange from 2018 to 2020.

Q: What are the implications of the Altman Z Score method for investors and stakeholders?

A: The Altman Z Score method can be used by investors and stakeholders to make better decisions related to investment and risk management. It can help them to identify companies that are at risk of bankruptcy and make informed decisions about their investments.

Q: What are the future research directions for the Altman Z Score method?

A: The future research directions for the Altman Z Score method include:

Application of the Altman Z Score method in other sectors: The Altman Z Score method can be applied to other sectors, such as the service sector or the agricultural sector.
Development of a new bankruptcy prediction model: A new bankruptcy prediction model can be developed based on the results of this study.
Investigation of the factors that influence the possibility of bankruptcy: Further studies can be conducted to investigate the factors that influence the possibility of bankruptcy of the company.