Early warning systems (EWS) are systematic indicator matrices used by lenders, auditors, and management to detect corporate distress before formal default occurs.

Critical Warning Triggers

• Operational Drift: A persistent erosion of gross margins paired with rising inventory days over multiple quarters.
• Governance Deterioration: Sudden, unexplained resignations of top financial executives or recurring delays in releasing audited statements.
• Credit Line Utilization: Sudden, complete drawdowns on discretionary revolving bank credit lines to cover basic operational expenses.

Risk and Credit Ratios

• Net Debt to EBITDA = (Short Term Debt + Long Term Debt – Cash) / EBITDA
• Debt Service Coverage Ratio (DSCR) = Net Operating Income / Total Debt Service
• Total Debt Service = Interest Expense + Principal Repayments
• Fixed Charge Coverage Ratio = (EBIT + Lease Payments) / (Interest Expense + Lease Payments)

Altman Z-Score for Public Manufacturing Companies

• Altman Z-Score = (1.2 * X1) + (1.4 * X2) + (3.3 * X3) + (0.6 * X4) + (0.999 * X5)
• X1 (Working Capital Variable) = Net Working Capital / Total Assets
• X2 (Retained Earnings Variable) = Retained Earnings / Total Assets
• X3 (Profitability Variable) = Earnings Before Interest and Taxes / Total Assets
• X4 (Leverage Variable) = Market Value of Equity / Total Liabilities
• X5 (Asset Efficiency Variable) = Revenue / Total Assets

Altman Z-Score for Private Manufacturing Companies

• Private Altman Z-Score = (0.717 * X1) + (0.847 * X2) + (3.107 * X3) + (0.420 * X4) + (0.998 * X5)
• Private X4 Variable = Book Value of Equity / Total Liabilities