FINANCIAL DISTRESS MODEL ACCORDING TO “Z MODEL” APPLIED TO MEXICAN STOCK EXCHANGE

Financial difficulties are not an avoidable situation in the future for any company. This situation could emerge due to the combined effects of excessive financial leverage and greater competitiveness in markets.

These factors are relevant when they are accompanied by economic crises or financial difficulties in the international economic situation, affecting as the headquarters and the countries in which the company has facilities and develops its activities. In this context, it is possible to evaluate the degree of resilience of companies using analysis of financial statements. A model based on this financial analysis that has been used since decades ago in predicting bankruptcy of companies is the “Z-score” model developed by Edward Altman.

This document include for academic proposals, an explanation about the relevance of understanding the time value of the money and the main indicators involved in this determination, in order to relate the healthy financial position of a company with adequate cash flows that results in optimal returns and moderate risks. The Z-score, which can be applied mainly to companies traded on stock exchanges, has been used in the present study in order to estimate the probability of bankruptcy of the companies that comprise the Mexican Stock Exchange, at the end of the year 2015.

The objective of this research is to deepen the understanding of financial distress applied to Mexican companies, developing an interesting source of academic literature for educational purposes related to finance and accounting.

The methodology applied in this document has been developed in order to introduce students to important techniques related to measure financial distress in companies, techniques that are used in empirical finance and to facilitate an awareness in students of how these techniques can be applied.

Subsequently, the research concludes with an academic proposal in order to identify the financial distress in companies, according to the Z-Score developed by Edward Altman.