L.C. Gupta’s sickness prediction model primarily focused on which of the following?

Correct option is C

L.C. Gupta's sickness prediction model was designed to identify early signs of financial distress in Indian companies, especially in the context of industrial units. This model emphasized the importance of profitability and liquidity indicators, primarily Earnings Before Interest and Tax (EBIT) and Operating Cash Flows, as these are crucial in evaluating a firm’s ability to sustain operations and generate enough funds internally.

By combining EBIT, which reflects a firm’s core operational profitability, with operating cash flows, which indicate actual liquidity and the firm’s ability to meet short-term obligations, Gupta’s model provided a more grounded and realistic assessment of sickness. These two metrics together offer a comprehensive view—EBIT captures profitability, while cash flow reflects financial health and solvency.

Information Booster:

• EBIT (Earnings Before Interest and Tax) is used to assess the core earning power of a company.

• Operating Cash Flow reflects the company’s actual ability to generate cash from day-to-day operations.

• Gupta's model assumes that a firm may be profitable but still sick if it cannot generate operating cash.

• It aligns with the Indian context where working capital constraints and delays in receivables are common.

• This approach helps in early detection of potential insolvency, even before losses are reported.

• The model supports banks and financial institutions in credit evaluation and risk monitoring.

• Useful for identifying hidden sickness where traditional profitability ratios may not show warning signs.

Additional Knowledge:

(a) Earnings Before Interest and Tax:
EBIT alone, though useful, does not consider liquidity. A firm may show operating profits but still face cash flow problems. Hence, Gupta did not rely solely on EBIT.

(b) Sales and Working Capital Levels:
While declining sales and weak working capital are operational symptoms, they were not the core variables in Gupta’s model. These are more relevant in other Indian sickness models or bank lending assessments.

(d) Market Value of Equity and Debt:
These are market-based indicators and require active capital markets and fair valuation, which are not always reliable or available in the Indian industrial sector, especially for unlisted firms.