Abstract
This study presents findings that will allow managers to determine if given levels of debt capital will likely lead to financial distress, and presents new tools for evaluating standard financial statements to predict the actual loan payment performance of firms - a good indication of financial stability or distress. The approach presented allows managers to estimate the amount of debt a firm can safely service and match this with strategic and operating plans. In addition, if adopted by commercial loan lenders, this technique could potentially increase the amount of money made available to firms, because it provides a measure for understanding the amount of debt a firm can safely handle. A two-step analysis has been applied to a large sample of commercial loan clients, using data supplied by a large national bank, with a remarkable ability to predict actual loan performance. If this approach is applied by business managers or commercial lenders, decisions regarding new debt will be made based on a better understanding of risk of non-payment, and fewer failures should result. This would also give managers confidence to take on loans needed for business expansion, while keeping those firms who cannot meet loan payment performance from taking on damaging debt.