This empirical study on two leading steel manufacturing companies of India, Steel Authority of India Limited (SAIL), a public sector undertaking, and Tata Steel Limited, the largest private sector company, aims at predicting bankruptcy or financial distress, using Altman’s Z-Score model which is based on several financial ratios. This research paper also investigates the long-term solvency position of the sample companies, by the use of a common technique of common-size analysis along with six solvency ratios in conjunction with the statistical technique of hypothesis testing. The Student’s t-test is carried out to examine the significance of difference in the various mean solvency ratios of SAIL and Tata Steel. The paper finally offers some relevant suggestions for improving the solvency position of the selected companies and also to be stay away from bankruptcy or financial distress.

Long-term solvency is concerned with two important elements: capital structure and earning power. “Capital structure refers to the sources of financing for a company. Financing can range from relatively permanent equity capital to more risky or temporary short-term financing resources” (Wild et al., 2007, pp. 519-528). Soon after the procurement of funds in the business from various sources of financing, the company subsequently acquires different assets. Assets represent security for providers of capital and range from loans secured by specific assets to other assets available as general security for unsecured loans. Thus, these and many other factors influence the degree of risk associated with different sources of financing and different assets.

Another important aspect of long-term solvency is earning power. It reflects the recurring ability of a company to generate cash from its operations. Earning-based tools are quite useful and reliable indicators of financial soundness. Earnings are the most significant and dependable source for payment of interest and repayment of borrowings. Stability in earnings helps company in procurement of funds by way of debt in times of need. “It is also a measure of the likelihood of a company’s rebounding from conditions of financial distress” (Wild et al., 2007, p. 519).

Providers of debt capital safeguard themselves against risk of insolvency and financial distress by incorporating restrictive covenants in the terms and conditions of loan agreements. “Restrictive covenants are contractual clauses in loan agreements that place certain operating and financial constraints on the borrower” (Khan and Jain, 2007, p. 232). These covenants cannot insure lenders against operating losses. The huge quantum of financing has led to some standardized tools and techniques to its analysis and evaluation. This research study explains and demonstrates how analysis tools and techniques enhance users’ decisions and also company valuation and lending decisions.

Accounting Research and Audit Practices, Economic Performance, Millennium Development Goals, Corporate Sustainability, Economic Transactions, Social Management, Environmental Accounting, Corporate Houses, Environmental Management System, Community Development, Waste Management, German Firms, United Nations Environment Program.