Effectiveness of Altman Model in Assessing Corporate Financialperformance Ofmanufacturing Firms Listed at Nairobi Securities Exchange

Abstract

Manufacturing industry is the most important sector in the economic growth of Kenya after the banking sector. The government of Kenya and other investors are concern with the performance of this manufacturing firm because the funds they have invested for the operation of these companies. The Kenya vision 2030 is targeting the contribution from this sector to GDP to be over 10% -15% annually. The amount of funds spent in running these companies is from the National Treasury and need to be accounted for and results seen for any specific period of operation. These firms are likely to have financial difficulties and finally failure and closure of operation. Their closure will result to economic challenges to the government, citizen and investors due to loss of income and capital. This raises valid concerns to investors and all other stakeholders. Therefore, the main objective of the study was to find out whether Altman MDA model is effective in assessing corporate financial performance of Manufacturing firms listed at NSE. This isof important tovariousinterested stakeholders in the Kenya in monitoring the financial performance of this industry by not only relying on financial ratio in detecting performance signals in these firms early enough to avoid corporate failure. Descriptive research design was adopted in this study where a census was carried out on the 8 manufacturing firms listed at NSE. The period of study was five years ranging from the financial year 2013-2017. The audited financial reports of these firms provided secondary financial data. This data was used to extract liquidity, profitability and leverage ratios which were then summed up to arrive at the Z-Score. Data analysis was conducted usingSPSS software program where output is tabulated. The study results indicated that Altman’s MDAmodel was appropriate for discriminating firms according to their financial performance at 82.9%. It concluded that MDA model can effectively be used to assess the financial performance in the manufacturing industry especially for listed companies at Nairobi Securities Exchange. The study recommends the adoption of Altman’s MDA model in assessing financialperformance of listed firms by not only investors but also business analyst, bond brokers, financial security firms and all other stakeholders.