The Turnaround Index ( B&ESI Conference Firenze - July 2014)

In times of crisis often the entrepreneur must decide whether to liquidate the company and the whole business firm or to recover by activating a turnaround process. The tool increasingly used in the international approach is the turnaround index able to attest whether a company can continue its activities in the future according to the going concern assumption. It is the index measured as a function of the economic and financial performance of the company, which assumes values between 0.1, satisfying performance and therefore averse turnaround, and 0.9 not satisfying performance, and therefore a high propensity to turnaround. This index defines whether there is a high or a low risk for a company to enter into crisis. It is the result of the integration of 7 indicators: a) return on sales, or ROS; b) the average change of the ROI; c) The average change in sales volume; d) The ratio between equity and invested capital; e) The ratio of own resources and the net financial credit; f) The coverage of the interest charges; g) The capacity to generate cash. The aim of this paper is to test the effectiveness of using the Turnaround index to assess the state of health of the company. For this purpose, we choose a sample of Italian listed companies and have applied the model to their annual report to be able to test and validate it. For these companies, we have calculated the turnaround index. After various researches and analysis, it is confirmed that the turnaround index is adequate to evaluate the opportunity of restructuring operations.