Chapter 15 Flashcards
current ratio
current assets/ current liabilities
quick ratio
(current assets - inventory )/ current liabilities
interest cover
PBIT / Interest payable
gearing ratio
long term debt / ( long term debt + equity)
operational gearing
fixed costs / variable costs
problems with ratio analysis
historical
ignores non financial issues
industry average is not appropriate to benchmark to analyse risk of failure
2 prediction models
Altmans Z Score
Argenti’s A score
what score on Altmans Z score is likely to fail in the next 2 years
less than 1,8
what score on altmans z score is safe
over 3
what is between 1.8 and 3
the eventual failure or non failure cannot be predicted with uncertainty
weakness of quantative measures
fails to include internal weakness that aren’t financial
does not consider the risk of a change in environmental factors
criticisms of Z Model
based on a sample of companies in US
analysis performed in 1960s
sample was only manufacturing companies
in argentis A score - what means there is no weakness
0
maximum score for defects ( Argenti)
10
maximum score for mistakes ( Argenti)
15
maximum score for symptoms ( Argenti)
0
maximum score for total ( Argenti)
25
what is considered safe
below 18
what is considered likely to fail
25 and over
disadvantage of argenti score
judgement of risk is subjective
lack of formal testing to prove models validity
lack of industry considerations
focuses mainly on internal factors
