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Stress test for bankruptcy of the Company (its counterparty) from InBridge Consulting: methods and algorithms

InBridge Consulting Company Financial Diagnostics - Effective Tools for Making Management Decisions.

The stress test for bankruptcy of a company (company counterparty) is an integral part of InBridge Consulting's financial diagnostics.

The result of financial diagnostics is a Report containing business analysis and draft management decisions to obtain competitive advantages.

An example of the structure of the Report on financial diagnostics and analysis of some indicators is given below.

A full Report provides for the analysis and provision of draft management decisions on more than 100 indicators with graphs, charts and other forms of displaying trends, conditions, etc.

Report on financial diagnostics and analysis of some indicators (extract from sections of the stress test)

Report content

Diagnosing the probability of bankruptcy (stress test):
two-factor model for calculating the probability of bankruptcy;
five-factor model of calculating the probability of bankruptcy E. Altman;
calculating the probability of bankruptcy using the Springate model;
a modified version of the five-factor model for calculating the probability of bankruptcy E. Altman;
calculation of the probability of bankruptcy according to the R. Lis model;
calculating the probability of bankruptcy by a universal discriminant function;
calculation of the probability of bankruptcy according to the Tuffler model;
a model for calculating the probability of bankruptcy of V. Paren and I. Dolgalov;
a model for calculating the probability of bankruptcy by a rating number (P. Saifulin and G. Kadykov).
Conclusions and draft management decisions

Report stress test examples

Financial diagnostics of the probability of the bankruptcy of the Company according to a two-factor model (example in the text of the publication)

Financial diagnostics of the probability of bankruptcy of the Company five-factor model for calculating the probability of bankruptcy E. Altman (example in the text of the publication)

Financial diagnostics of the probability of bankruptcy of the Company according to the Springate model (example in the text of publication)

Stress Test Findings
The company in all probability models of bankruptcy is at risk
In all models of bankruptcy probability, there is a steady negative trend of deterioration in financial condition.
The company will go into bankruptcy, according to:

  • a two-factor model for calculating the probability of bankruptcy - after one quarter;
  • a five-factor model for calculating the probability of bankruptcy of E. Altman - in two quarters;
  • calculating the probability of bankruptcy using the Springate model - after one quarter.

The main factors that influenced the negative trend in:

  • a two-factor model for calculating the probability of bankruptcy - reducing the coverage ratio, increasing the leverage ratio;
  • a five-factor model for calculating the probability of bankruptcy of E. Altman - reducing the coverage ratio and transformation ratio;
  • calculating the probability of bankruptcy by the Springate model - reducing the share of working capital in the total value, reducing the share of pre-tax profit in the total value of assets.

Proposals for the prevention of bankruptcy and the negative trend of the solvency index:
increase the share of working capital in total assets by 17 percent
due date: within two quarters
reduce short-term liabilities by 44 percent
due date: within one quarter
maintain gross margin to short-term liabilities 2: 1
due date: within two quarters

Appendix: Procedure for the provision of financial diagnostics services for a company