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Strategies & Market Trends : Bankruptcy Predictor Model -- Ignore unavailable to you. Want to Upgrade?

To: Bob Rudd who wrote (228)	3/28/1999 2:29:00 PM
From: Razorbak	Respond to of 477

Clarification: EBIT = Earnings Before Interest & Taxes <<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: Great point of clarification! When using the Altman model, I've always used the definition that EBIT equals "Earnings Before Interest and Taxes" (see definition in #reply-8569748, and sample analysis in #reply-8314969), which is what Altman and La Fleur describe in their 1981 article in The Journal of Business Strategy entitled "Managing a Return to Financial Health"... <<X3 = Earnings Before Interest & Taxes / Total Assets This ratio is calculated by dividing the total assets of a firm into its earnings before interest and tax deductions. In essence, it is a measure of the productivity of the firm's assets, abstracting from any tax or leverage factors. Since a firm's ultimate existence is based on the earning power of its assets, this ratio appears to be particularly appropriate for studies dealing with corporate failure. Furthermore, insolvency in a bankruptcy sense occurs when the total liabilities exceed a fair valuation of the firm's assets [with] value determined by the earning power of the assets.>> <<[Copyright © The Journal of Business Strategy, 1981]>> Perhaps I didn't make that clear in my initial posts, but I think that's what I've been calculating on each of my posted analyses. That was always my intention, of course, but perhaps I slipped up once or twice. If I missed any, please point it out so I can revise the calculations and re-post. Thanks. Razor