Financial Fragility and Sectoral Risk in MSMEs: A Longitudinal Validation of The Altman Z-Score Model in India

The post-pandemic economic landscape has amplified financial vulnerabilities in Micro, Small, and Medium Enterprises (MSMEs), necessitating granular and sectoral-level diagnostics. This study validates the application of the Altman Z-Score model for five Indian MSME sectors — Auto Components, Chemicals & Petrochemicals, Industrial Products, Pharmaceuticals & Biotechnology, and Textiles & Apparel — analyzing data from 2016-2024. Based on the firm-level dataset of 100 companies, the study classifies the firms into Distress, Grey, and Safe zones and examines the drivers of profitability using regression models where Net Profit, ROA, and ROE serve as dependent variables. The results indicate that although sales always have a positive impact on profitability, the effects of depreciation and raw material costs are negative across all indicators of performance. The sectoral interaction terms are also noteworthy, although they are statistically insignificant. The study as a whole captures a sector-wide financial performance comparison before and after COVID. This research incorporates risk analysis across time and sector disaggregation, and profitability modeling within the MSME distress context, which augments existing literature. Furthermore, it provides critical data for pre-emptively guiding managers, lenders, and policymakers towards understanding signs of impending financial distress and strengthening financial resilience. This study employs cross-sectional OLS regression with robust standard errors on a dataset of 100 MSMEs across five manufacturing sectors from 2016–2024, complemented by longitudinal Z-score tracking to capture pre- and post-COVID performance differentials.