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Financial Ratios as Financial Distress Predictors for SME in Czech Republic

Author

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  • Jan Adamec

    (University of South Bohemia in České Budějovice)

Abstract

Constructing models for predicting financial distress of small and medium enterprises requires its own treatment, because these firms differ from large campanies. The aim of this paper is to quantify the predictive power of selected ratios and to develop a statistical model for financial distress. We tested 16 financial ratios and the study relies on observations from 1563 firms. The model obtained by a methodology of conditional logit analysis includes quick liquidity ratio, average receivables collection period, leverage, solvency and interest coverage or debt coverage from current cash flow. The result confirmed that financial distress is closely related with the ability of a firm to pay its debts. Rentability wasn´t found as so decive predictor in short period, there is a more complicated relation between rentability and payment capacity. As significant predictor was identified current cash flow (adjusted ordinary profit), which is much closely connected with cash.

Suggested Citation

  • Jan Adamec, 2012. "Financial Ratios as Financial Distress Predictors for SME in Czech Republic," Acta Universitatis Bohemiae Meridionales, University of South Bohemia in Ceske Budejovice, vol. 15(1), pages 17-30.
    • Handle: RePEc:boh:actaub:v:15:y:2012:i:1:p:17-30
    DOI: 10.32725/acta.2012.002
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    More about this item

    Keywords

    SME Finance; Modeling Credit Risk; Accounting Ratio Analysis; Predictors of Failure;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions

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