Bankruptcy risk – what the models actually measure

Bankruptcy risk is often expressed as a percentage: the probability that a company goes bankrupt within twelve months. But what actually lies behind the number?

A statistical probability

The model compares the company with thousands of historical cases and finds the patterns that have preceded bankruptcy. The result is a probability, not a prophecy – low risk does not mean zero risk.

What drives the risk up

• Payment remarks and debt collection
• Weak liquidity and low equity
• Falling revenue over time
• An industry with a high bankruptcy rate

How to use it

Use bankruptcy risk as one of several bases for a decision. A company with a low score and high risk should be met with prepayment or a lower credit limit – not necessarily a no, but an adjustment.