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Profitability Ratio As A Tool For Bankruptcy Prediction

Author

Listed:
  • Daniel BRÎNDESCU – OLARIU

    (West University of Timisoara)

Abstract

The current study evaluates the potential of the profitability ratio in predicting corporate bankruptcy. The research is focused on Romanian companies, with the targeted event being represented by the manifestation of bankruptcy 2 years after the date of the financial statements of reference. All tests were conducted over 2 paired samples of 1176 Romanian companies. The methodology employed in evaluating the potential of the profitability ratio was based on the Area Under the ROC Curve (0.663) and the general accuracy ensured by the ratio (62.6% out-of-sample accuracy). The results confirm the practical utility of the profitability ratio in the prediction of bankruptcy and thus validate the need for further research focused on developing a methodology of analysis.

Suggested Citation

  • Daniel BRÎNDESCU – OLARIU, 2016. "Profitability Ratio As A Tool For Bankruptcy Prediction," SEA - Practical Application of Science, Romanian Foundation for Business Intelligence, Editorial Department, issue 11, pages 369-372, July.
    • Handle: RePEc:cmj:seapas:y:2016:i:11:p:369-372
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    Cited by:

    1. Antonio Pelaez-Verdet & Pilar Loscertales-Sanchez, 2021. "Key Ratios for Long-Term Prediction of Hotel Financial Distress and Corporate Default: Survival Analysis for an Economic Stagnation," Sustainability, MDPI, vol. 13(3), pages 1-17, January.

    More about this item

    Keywords

    Corporate finance; Risk; Failure; Financial ratio; Financial analysis; Classification accuracy;
    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
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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