“Financial distress occurs when a company struggles to meet its financial obligations, often due to declining revenues, high debt levels, or poor liquidity. In this case study, you will analyze a company’s balance sheet and key financial ratios to assess whether it is at risk of bankruptcy and what steps it could take to improve its financial position.”
📋 What you're given
You are an Investment Banking Analyst at a leading firm, preparing a report on Company X, a mid-sized manufacturing company. The company has recently faced a decline in revenue due to supply chain disruptions and increasing raw material costs. Investors are concerned about its financial stability, and your team has been tasked with evaluating its balance sheet to determine if it is in financial distress.
The following is Company X’s most recent balance sheet:
Task 1: Liquidity & Short-Term Solvency Analysis
Task: Calculate the following liquidity ratios to determine if Company X has enough short-term assets to cover its liabilities.
- Current Ratio: Compare total current assets to total current liabilities.
- Quick Ratio: Excludes inventory and only considers the most liquid assets.
💡 Hint: Current Ratio Formula
Current Ratio = (Cash + Accounts Receivable + Inventory) ÷ (Accounts Payable + Short-Term Debt)
💡 Hint: Quick Ratio Formula
Quick Ratio = (Cash + Accounts Receivable) ÷ (Accounts Payable + Short-Term Debt)
Task 2: Debt & Leverage Analysis
Task: Analyze how much financial risk Company X is taking on by calculating:
- Debt-to-Equity Ratio: Measures financial leverage.
- Interest Coverage Ratio: Indicates if the company can cover its interest payments.
💡 Hint: Debt-to-Equity Ratio Formula
Debt-to-Equity Ratio = Total Liabilities ÷ Shareholders' Equity
💡 Hint: Interest Coverage Ratio Formula
Interest Coverage Ratio = EBIT ÷ Interest Expense
Task 3: Bankruptcy Risk: Altman Z-Score
Task: Compute the Altman Z-Score to assess the probability of bankruptcy.
The formula is:
💡 Hint: Altman Z-Score Formula
Z = 1.2(A) + 1.4(B) + 3.3(C) + 0.6(D) + 1.0(E)
- A = Working Capital / Total Assets
- B = Retained Earnings / Total Assets
- C = EBIT / Total Assets
- D = Market Value of Equity / Total Liabilities
- E = Revenue / Total Assets
Task 4: Strategic Recommendations
Task: Based on your calculations, propose solutions to improve the company’s financial stability.
- Should Company X restructure its debt? If yes, how?
- Would selling non-core assets improve liquidity?
- Should the company raise funds through equity issuance?
- Can cost-cutting measures help without damaging the business?
💡 Model answer
Try answering out loud first — then reveal the model answer and compare.