There are several ways of evaluating your business profits to determine if it is profitable. One way is to consider five important ratios of your assets. Edward Altman devised five ratios which are capable of predicting with accuracy as much as five years in advance whether you are in danger of bakruptcy. They include: 1) the ratio of net working capital to total assets; 2) the ratio of retained earnings to total assets, 3) the ratio of earnings before income taxes (EBIT) to total assets; 4) the ratio of the market value of total equity ( common and preferred stock) to the book value of total debt; and 5) the ratio of sales to total assets.
When considered, the lower the score, the greater the probability of bankruptcy. To ensure accuracy, it would be wise to engage the opinion of your baker or accountant. Knowing how to go about computing this score would assist business owners in developing a strategy and making plans to successfully market the business.
Filed under: Uncategorized | Tagged: bankruptcy, EBIT, Edward Altman, five financial ratios, market value, net woring capital, total assets
