Will any dealer groups and global car makers go bust in 2008?

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This post assessed the risk of bankruptcy for four dealer groups – three UK and one US and UK – and two global car makers in 2008 using three approaches to bankruptcy prediction: Z-Scores, Springate and Logit.

Ed Altman (1968) is the dean of insolvency predictors. He was the first person to successfully use MDA to develop a prediction model with a high degree of accuracy. Using a sample of 66 companies, 33 failed and 33 successful, Altman’s model achieved a bankruptcy prediction accuracy rate of 95.0%. Through continuing research Altman was able to refine his model to predict bankruptcy for public and private companies and for non-manufacturing businesses. It is now in common use by banks and investment analysts.

In Canada, Gordon Springate, following similar procedures to Altman in the U.S, managed to get the total number of ratios down to 4 and still predict bankruptcy with an accuracy of between 83% – 92%, depending on the size of the firm. Christine Zavgren developed Logit analysis to predict bankruptcy. Due to its use of sophisticated probability statistics her model is considered very robust. John Fulmer uses a similar statistical approach to Zavgren in his ‘H-Factor’ Model.

 

Description

Although business managers with experience of it describe bankruptcy as an unforseen event, analysts have long been predicting the event, using analysis of financial KPI’s. This post reviewed four retail dealer groups – Lookers, Pendragon, Inchcape and Penske – and two global car makers – GM and Ford – to assess their likelihood of going bust using three established methods. Only one dealer group, Penske, passed all of the tests.

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