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Bankruptcy prediction based on the debt ratio

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  • Daniel BRÎNDESCU-OLARIU

    (West University of Timisoara, Romania)

Abstract

The theory and practice of the financial ratio analysis suggest the existence of an important positive correlation between the debt ratio and the bankruptcy risk. Previous studies conducted on a sample of Romanian companies confirm this hypothesis and recommend the debt ratio as a useful tool for measuring the bankruptcy risk two years in advance. The objective of the current research was to develop a methodology for measuring the bankruptcy risk that would be applicable for Romanian companies. The target population consisted of all Romanian companies with annual sales of over 10,000 lei (aprox. 2,200 Euros). The research was performed over all the target population from Timis County (largest county in Romania). The study has thus included 53,252 yearly financial statements from the period 2007-2010. The results of the study allow for the setting of benchmarks, as well as the configuration of a methodology of analysis. The proposed methodology cannot predict with perfect accuracy the state of the company, but it allows for a valuation of the risk level to which the company is subjected.

Suggested Citation

  • Daniel BRÎNDESCU-OLARIU, 2016. "Bankruptcy prediction based on the debt ratio," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(2(607), S), pages 145-156, Summer.
    • Handle: RePEc:agr:journl:v:xxiii:y:2016:i:2(607):p:145-156
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    References listed on IDEAS

    as
    1. Daniel BRÎNDESCU – OLARIU, 2014. "The Potential Of The Equity Working Capital In The Prediction Of Bankruptcy," Management Intercultural, Romanian Foundation for Business Intelligence, Editorial Department, issue 31, pages 25-32, November.
    2. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    3. Edward I. Altman, 1968. "The Prediction Of Corporate Bankruptcy: A Discriminant Analysis," Journal of Finance, American Finance Association, vol. 23(1), pages 193-194, March.
    4. Ohlson, Ja, 1980. "Financial Ratios And The Probabilistic Prediction Of Bankruptcy," Journal of Accounting Research, Wiley Blackwell, vol. 18(1), pages 109-131.
    5. Daniel BRÎNDESCU – OLARIU, 2014. "Labor Productivity As A Factor For Bankruptcy Prediction," SEA - Practical Application of Science, Romanian Foundation for Business Intelligence, Editorial Department, issue 6, pages 33-36, December.
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    Cited by:

    1. Frank Ranganai Matenda & Mabutho Sibanda & Eriyoti Chikodza & Victor Gumbo, 2022. "Bankruptcy prediction for private firms in developing economies: a scoping review and guidance for future research," Management Review Quarterly, Springer, vol. 72(4), pages 927-966, December.

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