This ratio highlights the use of either internally generated funds for growth (low-risk capital) or OPM (other people’s money)-higher-risk capital. Those firms with high RE relative to TA have financed their assets through retention of profits and have not utilized as much debt. In addition, the RE/TA ratio measures the leverage of a firm. This is a measure of cumulative profitability over the life of the company. The account is also referred to as earned surplus. Retained earnings (RE) is the total amount of reinvested earnings and/or losses of a firm over its entire life. One observes that in the period 1996–2001, triple-A bonds had an average Z-Score of 6.2, while single-B bonds have an average score of 1.8. firms, in general, are far more risky than in the past. The main reason for this high error rate is that U.S. firms have a financial profile more similar to bankrupt companies than to healthy entities. As noted earlier, perhaps as many as 25 percent of U.S. While the Type I accuracy continues to be quite acceptable (i.e., greater than 80 percent prediction of default within one year of the default date), the Type II error has become quite high. The Type II error (classifying the firm as distressed when it does not go bankrupt or default on its obligations), however, has increased substantially with as much as 25 percent of all firms having Z-Scores below 1.81. ![]() ![]() We found that the Z-Score model, using a cut-off score of 2.675, was between 82 percent and 94 percent accurate. As such, will be different if the sample changes or if new variables are utilized. Note that the model does not contain a constant term. From the original list, five were selected as doing the best overall job together in the prediction of corporate bankruptcy. A list of 22 potentially helpful variables (ratios) was compiled for evaluation.
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