Bankruptcy prediction based on the debt ratio

• Main Author: Daniel BRÎNDESCU-OLARIU
• Format: Article
• Language: English
• Published: General Association of Economists from Romania 2016-06-01
• Series: Theoretical and Applied Economics
• Subjects: ratio analysis; financial statements; risk; accuracy; benchmark
• Online Access: http://store.ectap.ro/articole/1188.pdf

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.