Classifying manufacturing firms in Lebanon: an application of Altman’s Model

Abstract

This study analyzes whether Altman Z-score can accurately classify manufacturing companies operating in Lebanon. The empirical analysis examines eleven manufacturing companies over a period of 3 years from 2009 till 2011. Firms are classified according to Altman Z-score models and then compared to their actual classification. The study found that the Altman Z’ Score (1983) can serve as a barometer for classifying Lebanese manufacturing companies within the same sub-business sector. This finding can be used by banks for classifying their clients, by companies for evaluating their performance, and by investors for selecting stocks. First, small banks that cannot afford buying those expensive rating systems can employ the Z’ score to quantify the risk of the customers applying for a loan. Second, companies can set up for a manufacturing industry benchmark, make self- evaluation to track their ranking, and take necessary corrective actions ahead of time. Third, investors can employ the Z’ Score as a valuation tool to compare different companies.