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Tuesday, November 23, 2010

Financial Metrics - Bankruptcy Ratios

Early warning signs of bankruptcy are key to understanding and strategically planning the successful future.  Ratios can help predict bankruptcy before it's too late for a business to take corrective action and for creditors to reduce potential losses.  When steering the ship reviewing trends of the organization and strategically planning the change of direction can avoid the predicted future of a bankruptcy.  The following are the key bankruptcy ratios:
  • Working Capital to Total Assets
  • Retained Earnings to Total Assets
  • EBIT to Total Assets
  • Sales to Total Assets
  • Equity to Debt
  • Cash Flow to Debt


Working Capital to Total Assets - records net liquid assets relative to total capitalization and is a valuable indicator of a looming business disaster.  Consistent operating losses will cause current assets to shrink relative to total assets.

Net Working Capital / Total Assets = Working Capital to Total Assets Ratio

Retained Earnings to Total Assets - newer firms typically have low figures for this ratio and are illustrated by the frequency trend of businesses failing in three years.

Retained Earnings / Total Assets = Retained Earnings to Total Assets Ratio

EBIT to Total Assets - a measure of the effectiveness of the earning power of the asset values.

EBIT / Total Assets = EBIT to Total Assets Ratio

Sales to Total Assets - measure management's ability to function in competitive situations while not excluding intangible assets.

Total Sales / Total Assets = Sales to Total Assets Ratio

Equity to Debt - measures how much your business assets can decline in value before it becomes insolvent.

(Market Value of Common + Preferred Stock) / (Total Current + Long-Term Debt) = Equity to Debt Ratio

Cash Flow to Debt - known as one of the best predictors of business failure and measures the cash availability to cover debt.

Cash Flow / Total Debt = Cash Flow to Debt Ratio

Read more about ratios at:
Financial Metrics - Ratio Analysis Considerations