K-score categorisation of JSE listed sectors under the financial distress continuum theory: A quantitative approach

Figures & data

Figure 1. Financial distress continuum

Source: Author adapted from Cybinski (2001) and Corporate Renewal Solutions (2009)

Figure 2. Process of a financially distressed company

Source: Adapted from Corporate Renewal Solutions, 2009

Figure 3. Liquidations over the last 12 years

Source: Compiled by the author using data from SA Stats, 2017

Table 1. Sample of listed and delisted firms

		Delisted				Total (%) delisted	% of the sample	Total
Sector	Listed	2013	2014	2015	2016
Consumer goods	14	2	1	1	0	4	15	18
Consumer services	28	1	1	0	0	2	25	30
Industrial	46	2	3	2	1	8	44	54
Health care	3	1	1	0	0	2	4	5
Telecommunications	4	0	1	0	0	1	4	5
Technology	7	0	1	2	0	3	8	10
Total % within Sector	102	6	8	5	1	20	100	122
	83.6%	4.9%	6.6%	4.1%	.8%	16.4%		100.0%

Source: Author

Table 2. Definition of variables used in the K-score model

Variable	Calculation	Description
K	Overall K-score index
a	(total external financing/total assets) x 100	A gearing ratio in which preference shares are excluded from external financing.
b	(income before interest and tax/average total assets) x 100	Return on assets (ROA) is a profitability ratio indicating the level of management’s competence at using its assets to yield earnings, before the leverage effect of external financing.
c	(total current assets and listed investments/total current liabilities)	The current ratio is a liquidity ratio that measures a company’s ability to pay short-term and long-term obligations, however, it is modified to include listed investments.
d	(income after tax/average total assets) x 100	After tax-ROA is a profitability measure indicating how well a company uses its capital resources to generate income
e	(net cash flow/average total assets) x 100	An efficiency ratio that rates actual cash flows to the company assets without being affected by income recognition or income measurements.
f	(stock/inflation-adjusted total assets) x 100	An efficiency ratio showing the portion of assets tied up in inventory. Generally, a lower ratio is considered better. The use of inflation-adjusted figures provides for the effect of inflation on financial analysis and the continued existence of a company.

Source: Author sourced from De la Rey (1981)

Table 3. Descriptive statistics

Sector	Count			minimum	maximum	Std. Deviation	Mean	Finding	Rank
	Healthy	Grey Zone	Distressed
Consumer services	106	22	45	−1.893	3.569	1.108	0.616	Healthy	1
Consumer goods	57	20	18	−5.753	2.171	0.984	0.395	Healthy	2
Telecommunications	16	5	6	−4.434	1.658	1.360	0.012	Grey Zone	3
Health care	8	6	9	−3.805	2.090	1.140	−0.023	Grey Zone	4
Industrial	111	61	130	−3.811	2.463	0.924	−0.195	Distressed	5
Technology	15	17	21	−3.953	1.764	1.228	−0.244	Distressed	6
Total	313	131	229	−5.753	3.564	1.079	0.159

Source: Author

Table 4. K-scores across sectors

	Sum of Squares	df	Mean Square	F	Sig.
Between groups	13.198	5	2.640	2.864	.018
Within groups	106.897	116	.922
Total	120.095	121

Source: Author

Figure 4. Analysis of K-score variables across the entire sample

Source: Author

Table 5. Pearson correlation matrix

	ROS	K-score	Firm Size	Firm Age	Growth	Sector ID
ROS	1
K-score	0.6555***	1
Firm Size	0.1241***	−0.0887**	1
Firm Age	0.0203	0.0793**	0.2808***	1
Growth	0.2969***	0.3009***	0.2564***	0.1255***	1
Sector ID	−0.0738*	−0.2121***	−0.0048	−0.3356***	−0.1194***	1

***, **, * denote significance at 1%, 5% and 10% respectively.

Source: Author

Table 6. OLS and random effects results

	Pooled OLS		Random Effects
Variables	ROS	Growth	ROS	Growth
K-score	0.0712***	0.792***	0.0760***	0.147*
	−0.00371	−0.159	−0.00304	−0.0862
Firm Size	0.0329***	1.096***	0.0135***	0.312**
	−0.00577	−0.155	−0.00489	−0.139
Firm Age	−0.000299**	0.00041	−0.000207	−0.0103**
	−0.000127	−0.00454	−0.000158	−0.00455
Sector ID	0.00409*	−0.104	0.00646	−0.272*
	−0.00244	−0.0647	−0.00479	−0.149
Constant	−0.138***	−4.483***	−0.0227	1.604*
	−0.0364	−0.947	−0.0334	−0.962
Observations	673	673	673	673
R-squared	0.473	0.174	0.4579	0.0631
Number of ID	n/a	n/a	122	122

Note: Robust standard errors in parentheses. ***, **, * denote significance at 1%, 5% and 10% respectively.

Source: Author.

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