The risk of bankruptcy is real. This may be truer for some companies over other companies – those with higher debt levels are considered riskier than those with less debt. Nevertheless, you must account for this additional risk. But how do you estimate the additional risk to account for it?

Estimating the probability of bankruptcy is a challenge. If a firm has bonds listed, you can compute the probability of bankruptcy by contrasting its yield with comparable mature company’s bond yields. If this company has assets, the value of the assets in bankruptcy must also be considered.

If the company does not have bonds, a historical evaluation of the number of companies started vs. companies surviving will give you a probability of success in this space.