Proceedings

a total error for the case when this method does not indicate correctly the solvent and
insolvent companies of 11.25% (25%·45%). We can conclude that the prioritary usage
of this method will indicate companies with no insolvency risk.
For IMC = 0 (the company has not recorded any modifications of MC), the probability
for a company to be bankrupt and not solvent is 1.067 (the ratio between the
probabilities for the two states), and an increase of the index by one unit (IMC = 1,
double MC from one period to another) will amplify this risk by 0.862, eventually
generating an insolvency risk of 0.920 = 1.067·0.862 (the ratio between the
probabilities for the two states). The MC method successfully indicates 40% of the
solvent companies (error 60%) and 80% of the insolvent companies (error 20%),
resulting in a total error for the case when this method does not indicate correctly the
solvent and insolvent companies of 12% (60%·20%). We mention that this method
can be considered ideal for recognizing companies with an insolvency risk, in the
conditions in which the capital market is sensitive enough to any element that may
indicate the presence of this risk.
For IVFCF = 0 (the company has not recorded any modifications of VFCF), the
probability for a company to be bankrupt and not solvent is 0.975 (the ratio between
the probabilities for the two states), and an increase of the index by one unit (IVFCF =
1, double VFCF from one period to another) will amplify this risk by 1.243,
eventually generating an insolvency risk of 1.212 = 0.975·1.243 (the ratio between the
probabilities for the two states). The VFCF method successfully indicates 60% of the
solvent companies (error 40%) and 50% of the insolvent companies (error 50%),
resulting in a total error for the case when this method does not indicate correctly the
solvent and insolvent companies of 20% (40%·50%). Since there is the risk not to
provide the best clues on the presence of the insolvency risk (error risk = 20%), we
consider that the VFCF-based method is not appropriate for signaling the insolvency
risk.
Following the analysis of the LRA evaluation method, we consider it appropriate to
use the EV method, which can successfully indicate the presence of the insolvency
risk in the company, having the lowest error risk (11.25%).
CONCLUSIONS
This study brings a series of contributions concerning the relevance of the evaluation
methods in presenting the actual state of the companies and their real value, in
conditions of economic instability.
An essential point in this study is the identification of the usefulness and of the degree
of objectivity of each evaluation method, as well as of the opportunities to signal
insolvency risks, extremely useful in the managers’ approaches to govern companies
by reporting the decisions to the value of the business; here we refer to the concept of
“governance through value”. The patrimony methods, although currently challenged
for their inability to encapsulate in the value of the company anything but what is
recorded in the accounting statements, provide a prudent value image, appropriate in
conditions of economic instability, favoring the long-term preservation of the business
stability. The methods based on the discounted cash flows, although highly valued,
provide, in our opinion, a distorted image on reality because of their relativity and
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