ET 500: 114 S&P BSE 500 companies stare at financial stress

One out of every three companies in the S&P BSE 500 index excluding banks and financial institutions may face tighter financial conditions in the next two years, according to a statistical parameter called Altman's Z-Score.

The score is a combination of five weighted ratios - liquidity, earnings power, EBITDA margin, market value and assets turnover. It is used to understand credit risk when investing in equities. Companies with a Z-score of less than 1.8 are in the 'distress zone'.

But this has to be weighed against the stage in which a company is in. For instance, companies in the investment mode may carry large debt relative to equity on their balance sheets during the early years of expansion. As projects are commissioned, the generated cash flows are used to repay debt.


According to Bloomberg data, there are 114 companies in the sample having Z-score less than 1.8, including Shree Renuka Sugar, Reliance Defence, Bajaj Hindustan, SAIL, MRPL, and BHEL.