What does Retained Earnings/Total Assets mean?
This measures cumulative profitability over time as a proportion of total assets. This discriminates against younger firms (c. 50% of all failings companies do so in their first five years of existence). In addition, this measures the leverage of a firm (high scoring firms have financed their assets through retention of profits, rather than debt). Note: the Retained Earnings figure used includes all shareholder reserves. Altman notes that these are subject to "manipulation" via corporate quasi-reorganizations, so this could require further adjustment.
