The Fundamental Power Index and Altman model in bankruptcy analysis

Banking (financial) crisis was the result of constellation of many parts. The financial crisis was initiated by the collapse of the Lehman Brothers (in US) investment bank in 2007. In consequences these crisis has become a crisis of a global dimension, having a very strong influence on the functioning of economies in the world. Capital markets, reacted very strongly to this phenomenon.

Bankruptcy and crisis are inseparable elements of the market economy. The financial/global crisis, has affected all spheres of social and economic life. This proves that the crisis can manifest itself in different ways. In the case of companies it is noticeable the quickest in their economic and financial condition which is a derivative of their functioning in the economy. 

During the crisis time the number of a collapses or liquidation of such entities rose. But at the same time, this creates an opportunity for the emergence of new companies.

Therefore, what is interesting, is whether collapses and bankruptcies of companies in the period of crisis are actually a phenomenon occurring on a large scale. Based on observation of changes over time of the phenomenon of bankruptcies or collapses, can one talk of coming out of the crisis or of its deepening? Can one observe positive aspects of the crisis? Another problem is how to measure bankruptcy symptoms? What is more, analysts are interested in appropriate methods for bankruptcy prediction. In the literature many methods exist, one of which is the Altman model. In addition there are also new approaches – one of them is the Fundamental Power Index (FPI). .

This main goal of the paper is to investigate the effects of bankruptcy and collapse in the years of the economic crisis. Estimation of bankruptcy and/or collapse for entities was conducted by using two kinds of methods: the Altman model and FPI. In the paper, comparison of these methds was conducted.

The research was conducted for companies listed on the Warsaw Stock Exchange. The analysis covered the 2007 – 2014 period. The study also used information about the fundamental strength of companies and the relationship with the problem of bankruptcy and collapse. Other economic and financial factors were taken into account permitting assessment of effects of the crisis and any positive impact.