Three indicators can reveal SME insolvency risk up to four years in advance

Most insolvencies of European SMEs & MidCaps do not come as a surprise. In fact, they are typically the consequence of ongoing corporate distress over several years. Looking at 1,653 companies in Germany, France, Italy and Spain, three phases can be identified, each different in type and length: a strategy crisis, a profitability crisis and then a solvency crisis. Once the profitability crisis sets in, corporate distress can be detected and observed by a systematic analysis of a company’s financial situation.

In all four countries, the mean financial profile of all the insolvent companies analysed was relatively low four accounting years prior to insolvency. German companies attained a mean financial profile of less than BB-, while the French, Italian and Spanish firms scored around B+. By the last accounting year before the insolvency, the scores decreased considerably down to below B+ in Germany, B- in France and around CCC in Italy and Spain. In comparison, the mean financial profile of all SMEs & MidCaps in the four countries is about BB.

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