- determine if it is an indicator of potential cash flow
problems
Growth in accounts receivable or inventories that
is less the growth rate in sales.
no
- determine if it is an indicator of potential cash flow
problems
Capital expenditures that substantially exceed cash
flow from operations.
yes
- determine if it is an indicator of potential cash flow
problems
A substantial shift from long-term borrowing to
short-term borrowing
yes
- Below are various states of financial distress:
1. defaulting on a principal payment on debt
2. restructuring debt
3. filing for bankruptcy
4. failing to make a required
interest payment on time
What is the order of increasing gravity that analysts typically consider when assessing credit
risk and bankruptcy risk according to a continuum of financial distress?
4, 2, 1, 3
- Univariate bankruptcy prediction models help identify factors related to bankruptcy, but they do
not provide information about:
a. specific ratios that are important.
b. the relative importance of individual financial statement ratios.
c. which specific company will go bankrupt.
the relative importance of individual financial statement ratios
- Asset Turnover
Sales/Total Assets
- Return on assets
Net Income/Total Assets
- Capital structure leverage
Average Total Assets / Average Shareholders' Equity
- Current ratio
Current assets/ current liabilities
- Quick Ratio
(Current Assets - Inventory) / Current Liabilities
