Journal article Open Access

Using Altman Z-Score to Assess the Financial Effects of Multiple Loans on SMEs

Lubawa, Galinoma; Louangrath, P.

We examine financial statements from 102 SME firms with multiple loans in order to verify whether multiple loans significantly affect financial health of SMEs. These SMEs are drawn from Iringa, Tanzania. The intended contribution of this research is the practical applications of the methods and findings which would serve as a guide for risk assessment by lending institutions, and performance bench marking for SMEs. The methodology employed in this research relies on parametric and nonparametric tests. The Altman Z-test for firm’s financial distress was used as the standard tool to assess SMEs financial performance. Other methods, such as Springate modified Z, Fulmer F-score and Legault CA-score were employed as comparative measures. The finding shows that multiple borrowing had significantly moved a number of firms from Altman’s “safe zone” to the “gray zone”; however the effect size under Cohen’s d is 0.49.

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