FINANCIAL HEALTH

1. FINANCIAL HEALTH
Presented By:
Junaid Suri (MC16-255)

2. Financial HEALTH:
Financial Health is a term used to describe the state of one’s
personal financial situation. There are many dimensions to financial
health, including the amount of savings you have, how much you are
setting away for retirement and how much of your income you are
spending on fixed expenses.

3. Importance of financial health:
Financial health as important as physical health. Money and financial
issues can be significant source of stress for people. This illustrates
the point that those who plan for their financial future tend to feel
better off. It is important that employers acknowledge the
connection between the physical wellbeing of their employees and
financial stress.

4. Components of Financial Health:
• Four Components has defined financial health: Spend, Save,
Borrow, and Plan. These components mirror your daily financial
activities. What you do today in terms of spending, saving,
borrowing, and planning. For example, will you be able to handle
a car breakdown or an extra medical bill? Will you be able to
save for college or go on your dream vacation?
•

5. Indicators of Financial Health:
• Eight Indicators has defined how to become Financially Healthy:

6. Financial health of a company:
A company's bottom line profit margin is the best indicator of
its financial health and long-term viability. To accurately
evaluate the financial health and long-term sustainability of a
company, a number of financial metrics must be considered.
Four main areas of financial health that should be examined
are liquidity, solvency, profitability and operating efficiency.

7. 1) liquidity:
• Liquidity is a key factor in assessing a company's basic
financial health. Liquidity is the amount of cash and easily-
convertible-to-cash assets a company owns to manage its
short-term debt obligations. Before a company can prosper
in the long term, it must first be able to survive in the short
term. The two most common metrics used to measure
liquidity are the current ratio and the quick ratio.
•

8. 2) solvency:
• Closely related to liquidity is the concept of solvency, a
company's ability to meet its debt obligations on an
ongoing basis, not just over the short term. The debt-to-
equity (D/E) ratio is generally a solid indicator of a
company's long-term sustainability, because it provides a
measurement of debt against stockholders' equity, and is
therefore also a measure of investor interest and
confidence in a company.

9. 3) operating efficiency:
• A company's operating efficiency is key to its financial
success. Operating margin is the best indicator of its
operating efficiency. This metric indicates not only a
company's basic operational profit margin after deducting
the variable costs of producing and marketing the
company's products or services; it thereby provides an
indication of how well the company's management controls
costs.
•

10. 4) profitability:
• While liquidity, basic solvency and operating efficiency are all
important factors to consider in evaluating a company, the
bottom line remains a company's bottom line: its net
profitability. The best metric for evaluating profitability is net
margin, the ratio of profits to total revenues. A larger net
margin, means a greater margin of financial safety.

11. Financial risk of a company:
Risk is inherent in any business enterprise, and good risk
management is an essential aspect of running a successful
business. Sometimes, the best a company can do is try to
anticipate possible risks, assess the potential impact on the
company's business and be prepared with a plan to react to
adverse events. Financial risk categorize into four broad
categories: market risk, credit risk, liquidity risk and operational
risk.
•

12. 1) Credit risk:
• Credit risk is the risk businesses incur by extending credit to
customers. It can also refer to the company's own credit
risk with suppliers. A company must handle its own credit
obligations by ensuring that it always has sufficient cash
flow to pay its accounts payable bills.

13. 2) Market risk:
• Market risk is the possibility of an investors experiencing losses
due to factors that affect the overall performance of the
financial markets in which he or she is involved. Market risk, also
called ‘’systematic risk’’, cannot be eliminated through
diversification.

14. 3) Liquidity risk:
• Liquidity risk includes asset liquidity and operational funding liquidity
risk. Asset liquidity refers to the relative ease with which a company
can convert its assets into cash should there be a sudden,
substantial need for additional cash flow. Operational funding liquidity
is a reference to daily cash flow. General or seasonal downturns in
revenue can present a substantial risk if the company suddenly finds
itself without enough cash on hand to pay the basic expenses
necessary to continue functioning as a business.
•

15. 4) operational risk:
• Operational risks refer to the various risks that can arise from
a company's ordinary business activities. The operational
risk category includes lawsuits, fraud risk, personnel
problems and business model risk, which is the risk that a
company's models of marketing and growth plans may
prove to be inaccurate.
•

16. • JOURNAL TITLE: Financial health and management
practices
•
• YEAR OF PUBLICATION: 2018
•
• PUBLISHED IN: JOURNAL OF FINANCIAL CRIME
•
• AUTHORS: Shamimul Hasan, Normah Omar, Rashedul Hassan
•
•

17. • The purpose of this study is to examine the relationship between
financial strength or condition and managerial practices in
preparing financial statements of public limited companies. The
objectives of this study are threefold – to measure the financial
strength, to measure integrity index and to examine the
relationship between management practices and financial
strength.
•
•
Abstract:

18. • Financial ratios, Altman’s Z-Score, integrity index, ranking
approach and chi-square test are used to achieve the objectives.
A multi-year cross-country analysis is done by considering
sample of seven Asian countries, namely, Malaysia, Singapore,
Thailand, Indonesia, Hong Kong, China and Japan.
•
Design/methodology/approach:

19. FINDINGS:
• The study catches the relationship between management practices and
financial strength across sample countries. Management practices is
one of the responsible factors for this relationship. They use
discretionary power in preparing financial statements to control the
trading results. The principles of accounting do not support the
alteration of financial data to look the company better on paper. The
cost of financial statement fraud is higher than other occupational
fraud.
•
•

20. Research limitations/implications:
•
• This study does not cover factors other than management
practices and further study could be conducted to look for the
other reasons that may also responsible for the deviations.
•
•

21. • Practical implications:
• Conflict of interest between shareholders and board of directors is not a new
phenomenon. Auditing system is introduced to minimize this conflict of
interest, but they failed to uphold their position in reality. Management
also needs to prove their integrity in financial statements. Ethical
consideration is the highest priority.
• Social implications:
• Stakeholders, especially regulators, professional bodies and academics,
should concentrate on the issue on ‘how to reduce the manipulation in
financial statements’ to create a safe investments avenue for the nation.
•
•

22. Introduction:
• Financial statement (FS) could be compared with a mirror through which
operating performance, financial performance and financial health of a
company are seen. It is a key document to the users’ of FS, such as
shareholders, creditors, potential investors, fraud examiners, financial
analysts, bankers, regulators, market operators, competitors,
academicians, researchers, reporters and other interested parties. It is
used as a primary source of financial information and considered as
authentic document too.
•
•

23. HYPOTHESIS:
• H1. There is a significant relationship between management
practices and financial strength across companies over the years.
• H2. There is a significant relationship between management
practices and financial strength across countries.
•

24. Research frame work:•
• The following model (Figure 1) depicted that the data from FS are used to measure financial
strength using Z-Score (ZS). The company’s financial strength could be categorized into
three group – Strong (Safe), Weak (Grey) and Poor (distress) based on Z-Score. Higher Z-
Score companies’ (strong) integrity of presenting FS is better than the lower Z-Score
companies as past studies shows that there is a link between low Z-Score and the
engagement of the company having it in the earnings management practices (Ahn and
Choi, 2009; Zang, 2012). On the basis of integrity index (II), ranking (RK) is established in
two ways – across companies over the years (OY) and across sample countries (AC) in Asia.
Then, the relationship between management practices (MP) and financial strength across
companies Health and management practices over the years (H1) as well as the
relationship between management practices and financial strength across countries (H2)
are tested using statistical tool – Chi-square (X2 ).
•

25. Method and sample:
•
• Simple random sampling technique of probabilistic method of sampling is
used to select the sample for this study. In all, 100 companies were
randomly selected from national stock exchanges of seven countries from
Asia, namely, Malaysia, Indonesia, Thailand, Hong Kong, Singapore, China
and Japan. This study adopts Altman’s Z-Score model (Altman and Lafleur,
1984) . Z-Score is a liquidity measure and proximity to the state of
bankruptcy of a company. As a liquidity measure, it can be viewed as
directly connected with the corporate earnings (Pustylnick, 2015). Financial
health or strength of a company can be assessed by its Z-Score such as Z >
2.67 = “Strong”, 1.81 < Z < 2.67 = “Weak” and Z < 1.81 = “Poor”.
•
•

26. Results and discussion :
• The results of financial strength of the sample companies across countries are
shown in Table I. It shows observed frequency based on Altman’s Z-Score for each country
(presented horizontally) and for Asia (presented vertically). The companies which are in
“Strong” group are financially much healthier than the “Weak” and “Poor” groups. The
highest number of companies (428 of 600) from Indonesia and the lowest number of
companies (176 of 600) from Malaysia are in strong group. It could be said the majority of
sample companies from Malaysia are suffering from liquidity crisis compared to other
sample countries in Asia.
•

27. • The results of integrity index are presented in Table II. It shows integrity index
over the years, overall integrity index and ranking position based on overall
integrity index of sample countries. The trend of integrity in presenting FS
across countries over the years is increasing and overall integrity index (OII)
is 48 per cent. It indicates that more than 50 per cent, that is, 52 per cent
companies are involved in manipulation of FS.
•

28. The results of testing the relationship between financial strength and management practices across companies over the years
(H1) and across countries (H2) are presented in Table III. It shows mixed results about the relationship between management
practices and financial strength across companies over the years. For Thailand, Japan, Malaysia and Singapore, H1 is rejected.
It indicates that there is no statistically significant relationship between management practices and financial strength. The
result of testing the relationship between management practices and financial strength across countries (H2) is also
presented in Table III. The hypothesis is accepted signaling that the deviations from expected frequency is because of some
other factors not the chance only account for it. The other possible factors might be use of discretionary power, poor
corporate governance, lack of corporate ethical culture, poor leadership qualities, lack of entrepreneurship orientation, poor
internal control, collusion between managers and directors, poor monitoring activities of the board, lack of auditor’s integrity,
collusion between managers and auditors and so on

29. CONCLUSION
•
• The financial strength of a company is an important component to predict
FSF(Financial statements frauds). Financially healthy companies do not
require to manipulate in FS and the manager of these companies maintains
integrity while preparing FS. On the other hand, financially distressed
companies cannot meet the expectation of other groups and they need to
manipulate in FS to fulfill the expectations of stakeholders. Therefore, the
integrity of management depends upon their financial condition. The
results of association between managerial practice in preparing FS and
financial health do not guarantee about the relationship, as it may be true
and may not be true in different setting. This study caught a significant
influence of managers on preparing FS.
•

30. • JOURNAL TITLE: Management Of Pension Discount Rate And
• Financial Health
•
• YEAR OF PUBLICATION: 2016
•
• PUBLISHED IN: Journal of Financial Economic Policy
•
• AUTHORS: Paula Diana Parker, Nancy J.Swanson, Michael
• T.Daugan
•
•
•

31. Abstract:
• Purpose: The aim of this article to examine the unexpected
portion of the pension discount rate to determine if the pension
discount rate is being used to manage earning for both
financially healthy and financially unhealthy firms as categorized
based upon their Altman Z-score bankruptcy.
•

32. • Research Design/ Methodology: Regression analysis
is conducted with the unexpected portion of the
pension discount rate as the dependent variable and
various metrics indicating potential firm strengths and
weakness as the independent variables.
• Findings: This study finds evidence that suggest
managers for both groups of firms are using their choice
of discount rate to manage bottom line earnings.
•

33. • Originality/ Values: Three streams of literature are
considered in this research: earnings management,
defined pension plan and Z-score bankruptcy.
• Key words: Pension funds, Accounting and Auditing,
Firm behavior.
• Paper type: Research paper
•

34. Introduction:
• Earnings management in the context of defined benefit
pension plan accounting as discussed in this paper is a
complex issue whereby a firm manager may seek to
Manipulatefinancialinformationwithoutregardfortheund
erlyingeconomiccondition of the firm’s defined benefit
pension plan

35. Introduction:
• Some of the most important pension assumptions and estimates
are based on the three pension rates that are required to be
disclosed in financial statements. These rates are the discount
rate, the compensation rate and the expected rate of return on
pension plan assets. The objective of our study is to examine
the relationship between the unexpected portion of the
discount rate and the economic determinants of accounting
choice considering the financial strength of firms.

36. Literature Review:
• The earnings management literature is so extensive that it is not feasible to
provide a comprehensive discussion. However, in accordance with positive
accounting theory many research studies attempt to explain accounting
choice by managers using combinations of sets of variables representing
three well-known hypotheses, which include the bonus plan hypothesis, the
debt/equity hypothesis and the political cost hypothesis. This area of
accounting research is well developed and widely accepted.

37. Literature Review:
• Earnings management studies to use the aggregate accruals method. The
advantage of this method is that it simultaneously considers the multiple
choices of managers or at least the aggregate outcomes of the multiple
choices made by manager. The disadvantages of this method Include its
limitation in detecting earnings management and its limitation in addressing
the portfolio of accounting choices made by managers. In addition, the
aggregate Accruals studies often lag both theories to manage accruals and
institutional knowledge of how accruals behave

38. Hypotheses Development:
• The unexpected portion of the discount rate is positively related to the funding ratio (i.e.
FundStat).
• The unexpected portion of the discount rate is positively associated with leverage (i.e. Lev).
• The unexpected portion of the discount rate is negatively associated with firm interest
coverage (i.e. IntCov).
• The unexpected portion of the discount rate is negatively associated with firm size (i.e. Size).
• The unexpected portion of the discount rate is negatively associated with auditor quality (i.e.
AQ).
•

39. Hypotheses Development:
• The unexpected portion of the discount rate is positively associated with the relative size
of the pension plan (PlanRelSize).
• The unexpected portion of the discount rate is negatively associated with market value of
equity to book value of equity (i.e. MVBV).
• The unexpected portion of the discount rate is negatively associated with working capital
(i.e. WC) which is the current asset ratio.
• The unexpected portion of the discount rate is positively associated with the stock
compensation bonus plans (i.e. StkComp).
• The unexpected portion of the discount rate is negatively associated with the auditor
opinion type (i.e. Opin).
•

40. Research Method:
• The primary objectives of earnings management research are to discover how
managers
manipulateearnings,todeterminewhatmotivatesmanagerstomanipulateearningsan
dto evaluate what costs and benefits are associated with manager manipulation.
However, no perfectly complete and precise model exits for measuring and
evaluating earnings management. In fact, the interpretations of evidence from the
earnings management literature are controversial in many instance, including
those related to pension accounting.

41. Conclusion:
●Variable ●Prediction ●Coefficient
●Intercept ●Positive ●0.32034000
●Health ●Positive ●0.23367000
●FundStat ●Positive ●o.oooo4410
●Lev ●Positive ●0.00007154
●IntCov ●Negative ●0.00000761
●Size ●Negative ●0.00399000
●AQ ●Negative ●0.04312000
●PlanRelsize ●Positive ●0.10103000
●MVBV ●Negative ●0.00494000
●Stkcomp ●Negative ●0.03822000
●Opin ●Positive ●0.00033468
●Interfund ●negative ●0.03971000

42. Conclusion:
• The value of R^2= 0.0813
• The value of adjusted R^2= 0.0740
• The Altman Z-score is a predictive quantitative model developed
in 1968 by Professor Edward Altman to predict bankruptcy by
using a combination of traditional financial ratios and a
statistical method known as multiple discriminant analysis.
•