Article2013

The use of financial ratios in predicting corporate failure in Sri Lanka

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Financial Distress and Bankruptcy Prediction Financial Analysis and Corporate Governance Corporate Insolvency and Governance

Abstract

The purpose of this research is to develop a model using financial ratios to predict corporate failure of listed companies in Sri Lanka. This study utilized publicly available data from annual reports of a sample of 70 failed firms and a sample of matched 70 non failed firms listed on Colombo stock market for a period covering the 2002 to 2008 financial years with logistic regression analysis. A total of fifteen financial ratios were used as predictor variables of corporate failure. Analysis of the statistical testing results indicated that the prediction accuracy of the model consists with financial ratios is 77.86% one year prior to failure. Furthermore, predictive accuracy of the model in all three years prior to failure is above 72%. Hence model is robust in obtaining accurate results for up to three years prior to failure. Final model includes three financial ratios; working capital to total assets, debt ratio and cash flow from operating activities to total assets. These variables are having more explanatory power to predict corporate failure. Therefore, model developed in this study can assist investors, managers, shareholders, financial institutions, auditors and regulatory agents in Sri Lanka to forecast corporate failure of listed companies.

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References

1968FINANCIAL RATIOS, DISCRIMINANT ANALYSIS AND THE PREDICTION OF CORPORATE BANKRUPTCY 1966Financial Ratios As Predictors of Failure 1972A Discriminant Analysis of Predictors of Business Failure 2002Predicting corporate financial distress: Reflections on choice-based sample bias 2005Have Financial Statements Become Less Informative? Evidence from the Ability of Financial Ratios to Predict Bankruptcy 2004Predicting corporate failure: empirical evidence for the UK 1980Ratio Stability and Corporate Failure 1985Using Operating Cash Flow Data to Predict Financial Distress: Some Extensions

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2015The Application of Altman’s Z-Score Model in Predicting Bankruptcy: Evidence from the Trading Sector in Sri Lanka 2016PREDICTING BANKRUPTCY OF SELECTED FIRMS BY APPLYING ALTMAN’S Z-SCORE MODEL 2017A theoretical approach to financial distress prediction modeling 2019Evaluating Financial Performance of Saudi Listed Firms: Using Statistical Failure Prediction Models 2015ANALISIS RASIO KEUANGAN TERHADAP KONDISI FINANCIAL DISTRESS PADA PERUSAHAAN MANUFAKTUR YANG TERDAFTAR DI BURSA EFEK INDONESIA TAHUN 2008-2013

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