Scenario presets
Balance Sheet & Income Statement Inputs
Insolvency & Solvency Diagnostics
Fulmer 9-Variable Decomposition & Weighting Schedule
Breakdown of each financial ratio, model weight multiplier, point contribution, and credit risk implication.
| Variable | Ratio Description | Raw Value | Model Weight | Point Contribution | Managerial Impact |
|---|
H-Score Sensitivity: Retained Earnings vs. Operating Cash Flow
Live Fulmer H-Score across varying historical cumulative profitability and cash generation.
H-Score Sensitivity: Total Debt vs. Net Sales Revenue
Impact of corporate debt leverage and annual top-line revenue scale on insolvency risk.
Fulmer H-Score: Bankruptcy Prediction Theory & Financial Analysis Guide
The Fulmer H-Score was developed in 1984 by Professor John G. Fulmer, Jr. and colleagues at the University of Tennessee at Chattanooga. In response to criticisms that earlier models (like Altman's Z-Score or Beaver's univariate ratios) were over-reliant on public equity market capitalization or too few variables, Fulmer analyzed 40 financial ratios across 60 matched industrial firms to build a robust 9-variable multi-discriminant framework.
Key Architectural Advantages
- Cash Flow Integration: Incorporates Cash Flow from Operations (CFO / Debt in V4), preventing companies with aggressive accounting accruals from masking liquidity crises.
- Firm Size Scale Factor: Applies $\log_{10}(\text{Total Assets})$ in V9, capturing the empirical reality that larger enterprises have superior banking relationships and capital market access.
- Cumulative Earnings Defense: Weights Retained Earnings / Total Assets at +5.528x (V1), reflecting the importance of historical equity reserves during distress.
- Debt Structure Balance: Distinguishes total financial obligations (V5) from short-term debt and working capital coverage (V7, V8).
Distress Zones & Decision Criteria
- $H \ge 0.00$ (Solvent Zone): The business is financially stable with healthy debt service coverage, positive asset earning power, and low failure probability.
- $H < 0.00$ (Distress Zone): The enterprise is in financial distress with a high likelihood of restructuring, insolvency, or bankruptcy within 1 to 2 years.
- Model Intercept (-6.075): The model includes a baseline hurdle penalty of -6.075 that must be overcome through strong operational performance.
- Empirical Accuracy: Demonstrated a 98% accuracy rate 1 year prior to bankruptcy and 81% accuracy up to 3 years prior.
Step-by-Step Worked Mathematical Example
Assume an enterprise reports the following financial parameters:
- Retained Earnings: $28,000,000; Total Assets: $100,000,000; Tangible Assets: $95,000,000
- Sales Revenue: $130,000,000; EBIT: $16,000,000; CFO: $15,000,000
- Total Debt: $45,000,000; Stockholders' Equity: $55,000,000; Current Liabilities: $18,000,000; Working Capital: $22,000,000
Step 1: Calculate the 9 Input Variables:
$$V_1 = \frac{\$28\text{M}}{\$100\text{M}} = 0.2800, \quad V_2 = \frac{\$130\text{M}}{\$100\text{M}} = 1.3000, \quad V_3 = \frac{\$16\text{M}}{\$55\text{M}} = 0.2909, \quad V_4 = \frac{\$15\text{M}}{\$45\text{M}} = 0.3333$$
$$V_5 = \frac{\$45\text{M}}{\$55\text{M}} = 0.8182, \quad V_6 = \frac{\$18\text{M}}{\$100\text{M}} = 0.1800, \quad V_7 = \frac{\$95\text{M}}{\$100\text{M}} = 0.9500$$
$$V_8 = \frac{\$22\text{M}}{\$45\text{M}} = 0.4889, \quad V_9 = \log_{10}(\$100,000,000) = 8.0000$$
Step 2: Apply Discriminant Weights & Sum:
$$H = 5.528(0.28) + 0.212(1.30) + 0.073(0.291) + 1.270(0.333) - 0.120(0.818) + 2.335(0.180) + 0.575(0.950) + 1.083(0.489) + 0.894(8.00) - 6.075$$
$$H = 1.5478 + 0.2756 + 0.0212 + 0.4233 - 0.0982 + 0.4203 + 0.5463 + 0.5295 + 7.1520 - 6.0750 \approx +4.74$$
Credit Takeaway: With an H-Score of +4.74 well above the zero cutoff, the firm demonstrates resilient financial solvency, backed by strong retained earnings and cash flow debt coverage.
Interactive Fulmer H-Score Knowledge Check
1. What is the critical benchmark cutoff for bankruptcy distress in the Fulmer H-Score model?
2. Why does the Fulmer model incorporate Variable V4 (Cash Flow from Operations / Total Debt)?
3. Which variable in the Fulmer model captures the protective effect of enterprise scale?
4. A company achieves an H-Score of -1.85. What does this indicate to creditors and equity investors?
Frequently Asked Questions
What is the Fulmer H-Score and how is it calculated?
The Fulmer H-Score is a 9-variable bankruptcy prediction model formulated in 1984 by John G. Fulmer using step-wise multi-discriminant analysis: H = 5.528*V1 + 0.212*V2 + 0.073*V3 + 1.270*V4 - 0.120*V5 + 2.335*V6 + 0.575*V7 + 1.083*V8 + 0.894*V9 - 6.075, evaluating cumulative profitability, liquidity, cash generation, debt obligations, and asset efficiency.
What is the distress classification cutoff for the Fulmer H-Score?
In the Fulmer model, the critical cutoff threshold is 0.00. An H-Score H < 0.00 classifies the firm in the distress zone with high probability of insolvency or bankruptcy. An H-Score H > 0.00 classifies the business in the solvent zone.
What empirical predictive accuracy was demonstrated by the Fulmer model?
Fulmer evaluated 60 enterprises (30 failed and 30 successful) across 40 financial ratios. The resulting 9-variable H-Score achieved a 98% classification accuracy rate in predicting bankruptcy one year prior to failure, and an 81% accuracy rate two to three years in advance.
Why does the Fulmer model include logarithmic transformations for total assets and total liabilities?
Variable V9 represents the log10 of total assets, which captures the protective effect of firm size (larger firms have superior access to credit markets and capital reserves), while V8 (working capital to total debt) and V5 (debt to equity) capture capital structure stability.