Fulmer H factor
What is the Fulmer H factor?
The Fulmer H factor is another well-known bankruptcy prediction model, developed on the basis of analysis of 40 financial ratios for 60 enterprises (30 bankrupt and 30 non-bankrupt). This defines a regression equation for diagnosing bankruptcy risk.
Note that this is a probabilistic model, so classifications will not be accurate 100% of the time. With that being mentioned, the model can certainly be used as a guide to understand which stocks may be safer, and which may be riskier.
Formula:
H Factor = 5.528 * X1 + 0.212 * X2 + 0.73 * X3 + 1.27 * X4 - 0.12 * X5 + 2.335 * X6 + 0.575 * X7 + 1.083 * X8 + 0.894 * X9 - 6.075
Definitions:
- X1 = Avg retained earnings / Average total assets
- X2 = Revenues / Average total assets
- X3 = EBIT / Total equity
- X4 = Cash flows from operations / Average total debt
- X5 = Average total debt / Total equity
- X6 = Total current liabilities / Average total assets
- X7 = log (Average tangible assets)
- X8 = Average working capital / Average total debt
- X9 = log (EBIT) / Interest expense
What does the Fulmer H factor mean?
If the value of this ratio is less than 0, the analyzed company can be classified as a company that might be struggling with its finances and even close to bankruptcy. If the value of ratio is more than 0, the company is considered to be in a stable condition.