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The Use of Financial Ratios in Predicting Corporate Failure in Sri Lanka

GSTF Journal on Business Review

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Field Value
 
Title The Use of Financial Ratios in Predicting Corporate Failure in Sri Lanka
 
Creator ., A.M .I. Lakshan
., W.M.H.N.Wijekoon
 
Subject Corporate failure prediction; logistic regression; financial ratios
 
Description The purpose of this research is to develop a model usingfinancial ratios to predict corporate failure of listed companies inSri Lanka. This study utilized publicly available data fromannual reports of a sample of 70 failed firms and a sample ofmatched 70 non failed firms listed on Colombo stock market fora period covering the 2002 to 2008 financial years with logisticregression analysis. A total of fifteen financial ratios were used aspredictor variables of corporate failure.Analysis of the statistical testing results indicated that theprediction accuracy of the model consists with financial ratios is77.86% one year prior to failure. Furthermore, predictiveaccuracy of the model in all three years prior to failure is above72%. Hence model is robust in obtaining accurate results for upto three years prior to failure. Final model includes threefinancial ratios; working capital to total assets, debt ratio andcash flow from operating activities to total assets. These variablesare having more explanatory power to predict corporate failure.Therefore, model developed in this study can assist investors,managers, shareholders, financial institutions, auditors andregulatory agents in Sri Lanka to forecast corporate failure oflisted companies.
 
Publisher GSTF Journal on Business Review (GBR)
 
Contributor —
 
Date 2014-08-20
 
Type info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion
Peer-reviewed Article
 
Format application/pdf
 
Identifier http://dl6.globalstf.org/index.php/gbr/article/view/149
 
Source GSTF Journal on Business Review (GBR); Vol 2, No 4 (2013): Journal on Business Review (GBR)
ISSN: 2251-2888
2010-4804
 
Language eng
 
Relation http://dl6.globalstf.org/index.php/gbr/article/view/149/175
 
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