Academic journal article UTMS Journal of Economics


Academic journal article UTMS Journal of Economics


Article excerpt


In this paper the applicability of the Edmister model for the assessment of credit risk in small and medium sized enterprises (SMEs) was examined by testing the hypothesis that the Edmister model is applicable for predicting financial difficulties of SMEs in Croatia. Data from a data base of financial reports of SMEs in Croatia managed by FINA, as well as internal data and records of one of the major banks in Croatia were used. Data of 822 enterprises were collected and analysed. The Edmister Z-score was calculated for all 822 SMEs and finally only enterprises with the Edmister Z-score lower than 0.47 or higher than 0.53 (a total of 760 enterprises) were selected to the final research sample. A method of classification analysis and compliance measurement Cohen's Kappa were used for testing the research hypothesis. On the basis of the research results, it can be concluded that the Edmister model is not applicable for predicting financial difficulties of SMEs in Croatia.

Keywords: the Edmister model, credit risk analysis, Croatian SME's, financial difficulties, discriminant analysis, classification method, Cohen's Kappa.

Jel Classification: E51; G32

(ProQuest: ... denotes formulae omitted.)


Majority of models that predict financial difficulties and estimate credit risk for enterprises, as the Beaver model (Beaver 1966), Altman model (Altman 1968), Deakin model (Deakin 1972.) or Ohlson model (Zenzerovic and Perusko 1980), have been developed on samples of large PLCs. An additional drawback of these models is the fact that the model variables are different financial ratios taken for a single time period; hence the models do not include trends of observing movemens. The Edmister model, applied in this research, is one of few credit risk models developed on SMEs and based on observing trends in financial ratios of individual enterprises compared to ratios of other companies operating in the same branch of activity. Namely, various studies has indicated that a business crises does not happen overnight, on the contrary, it is forebode for about four years prior to its manifestation, through a decrease in income or a continuous slowdown in profit compared to GDP (Osmanagic Bedenik 2009). In addition, the Edmister model has been developed on a sample of SMEs with a default status, i.e. in financial distress. Most other models are developed on models of enterprises which underwent bankruptcy, which is the worst case scenario and ultimate phase of financial distress, manifested at an earlier stage as problems with honouring payments in due date. For creditors it is crucial to spot warning signs indicating financial distress, in order to cut down potential loss resulting from business relations with enterprises in financial difficulties, by means of acceleration claims or other financial instrument.

The objective of this research is to examine the applicability of the Edmister model for evaluation of credit risk of SMEs in Croatia. We have tested the research hypothesis that the Edmister model is applicable for the prediction of financial difficulties in SMEs in Croatia - is. Since, as far as we know, the reliability of using the Edmister model in predicting financial difficulties has not been tested on a sample of Croatian enterprises, this research has an applicable value due to its contribution to the development of SMEs credit risk analysis in Croatia as well as fostering similar research in the region.


Robert O. Edmister, was among the first to begin research of small enterprises (SE), as a part of his Doctoral thesis at Purdue University, Lafayette, Indiana (Edmister 1972). Prior to his scientific career Edmister worked in the banking industry as a senior credit analyst, which streamlines the focus of his thesis towards predicting failures of small enterprises based on analysis of financial ratios. He has proven that individual financial indicators, as well as relations between specific financial indicators, are not predictors of financial difficulties of small enterprises, it was necessary to calculate at least a three year trend of various financial ratios and groups of ratios in order to predict financial distress. …

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