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Strategies & Market Trends : Bankruptcy Predictor Model
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To: Razorbak who wrote ()3/28/1999 1:03:00 PM
From: Bob Rudd  Read Replies (1) of 477
 
Clarification: Ran accross this
<<X3 = ET + IN divided by TA
The most important factor. Profit is the principal objective and is the force that eventually determines the vitality of the firm. INTEREST IS ADDED TO THE EARNINGS as this cost does not detract from the earning power of the firm. >> [CAPS for emphasis mine]
in an article by Gregory J. Eidleman, CPA, is assistant professor of accounting at Penn State University, Hazleton Campus.
Same article contained this:
<<Where X.sub.3 = Earnings Before Income Taxes/Total Assets. This is a measure of operating efficiency separated from any leverage effects. It recognizes operating earnings as a key to long-run viability.>>

Could it be that we should be adding back interest expense?
The Springate model I posted earlier uses two terms Earnings Before Taxes, and Earnings Before Interest and Taxes. Presumably the former features adding back interest expenses. Springate's work appears to have have piggybacked on Altman's, so this might tend to confirm that this is what is meant.
A possible source of confusion - EBIT is widely understood today to mean Earnings Before Interest and Taxes, but when this stuff was originally presented EBIT may have been used as Earnings Before Income Taxes.
If you have original Altman source material, you might confirm this.

Bob
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