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The Potential Of The Debt Ratio In The Prediction Of Corporate Bankruptcy

Author

Listed:
  • Daniel BRINDESCU-OLARIU

    (West University, contact@levier.ro, Timisoara, Romania,)

Abstract

The current study evaluates the potential of the debt ratio in predicting corporate bankruptcy. The population subjected to the analysis included all companies form Timis County with yearly sales of over 2200 Euros. The interest for the debt ratio was based on the recommendations of the scientific literature, as well as on the availability of information concerning its values to all stakeholders. The event on which the research was focused was represented by the manifestation of bankruptcy 2 years after the date of the financial statements of reference. All tests were performed over a paired sample of 1424 companies. The methodology employed in evaluating the potential of the debt ratio was based on the general accuracy ensured by the ratio (61.8%) and the Area under the ROC Curve (0.644). The results suggest limited practical utility of the debt ratio in the prediction of bankruptcy within a simple univariate analysis. This conclusion shows that, although the general belief is that high debt ratios are the main cause of corporate bankruptcy, the use of the debt ratio alone for the prediction of corporate bankruptcy leads to relatively poor results. It is expected that the inclusion of the debt ratio within multivariate models for bankruptcy prediction would exploit its potential more fully.

Suggested Citation

  • Daniel BRINDESCU-OLARIU, 2015. "The Potential Of The Debt Ratio In The Prediction Of Corporate Bankruptcy," Journal of Public Administration, Finance and Law, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 0(Special i), pages 37-45, September.
    • Handle: RePEc:aic:jopafl:y:2015:v:s2:p:37-45
    as

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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. Daniel BRÎNDESCU – OLARIU, 2014. "The Correlation Between The Autonomy Ratio And The Return On Equity," Management Intercultural, Romanian Foundation for Business Intelligence, Editorial Department, issue 31, pages 407-414, November.
    3. 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.
    Full references (including those not matched with items on IDEAS)

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    1. 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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