The indicators or ratios represent one of the most important instruments used by analysts to assess and monitor the firms' financial performance167. For many years, they have searched for measures that allow foreseeing, with certain anticipation, the probability that a firm will undergo a situation of financial distress.
Various studies developed during the first half of the last century revealed the power of certain indicators to predict bankruptcy, with measures of performance, liquidity and solvency being the top-performing indicators168. These studies were followed by Altman's work (1968), intending to select a set of indicators that would consistently allow a statistically supported recommendation. Altman analyzed bankruptcy cases by estimating a multivariate equation under the format of the multiple discriminative analysis and suggested the adoption of an indicator -Z Coefficient - that measures the probability of bankruptcy of a company.
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167 The use of financial ratios during PPP construction and operation stages to monitor the firms' performance is discussed in detail in module 3.
168 Some works, as the ones prepared by Smith and Winakor (1935) and Merwin (1942), show that firms that went bankrupt did not follow a uniform pattern in the indicators over time. Beaver's work (1967), which developed a univariate model, intended to determine the probability of a firm's bankruptcy. Then, taking the Debt to Assets ratio, it could be foreseen if a suspension of payments was going to take place within five (5) years and, if any, the number of years for the situation to come.