Predicting Corporate Bankruptcy using Financial Ratios: An Empirical Analysis: Indian evidence from 2007-2010

Abstract

The financial failure or bankruptcy is a consequence of company inefficiency that can produce substantial losses to banks, suppliers, shareholders and a whole community. Thus, these interested parties are showing concern for predicting the company failure and more interestingly when it will fail. So, it is possible to predict the economic/financial situation of “Bankruptcy” using financial statements. These traditional analyses of financial ratios are able to detect the operative and financial difficulties of a company. This study basically aims to develop the model based on the accounting information (13 ratios) that predicts the bankruptcy. For this, we tested 26 companies listed on NSE, India from 2007-2010. The sample was composed of 13 bankrupt companies and 13 healthy companies matched on industry. Multiple discriminant analysis (MDA) was used to test these two groups i.e. bankrupts and non-bankrupts. The found function was presented followed by the discussion and implications were highlighted.