An evaluation of Altman's Z-score using cash flow ratio to predict corporate failure amid the recent financial crisis: Evidence from the UK

This paper investigates the extension of the Z-score model in predicting the health of UK companies; using discriminant analysis, and performance ratios to test which ratios are statistically significant in predicting the health of UK companies from 2000 to 2013. The purpose of this study is to contribute towards Altman's (1968) original Z-score model by adding a new variable. We found that, cash flow when combined with the original Z-score variable is highly significant in predicting the health of UK companies. A J-UK model was developed to test the health of UK companies. When compared to the Z-score model, the predictive power of the model was 82.9%, which is consistent with Taffler's (1982) UK model. Furthermore, to test the predictive power of the model before, during and after the financial crisis period; results show that J-UK model had higher accuracy to predict the health of UK companies than the Z-score UK model. Thus, the extension of Altman's Z score model leads to better results and assists users such as researchers, managers, regulators and other practitioners to manage their risk profile more effectively.