A study on capability of financial ratios in predicting bankruptcy of firms: Evidence from Tehran Stock Exchange

Abstract

This paper measures the likelihood of bankruptcy based on some financial ratios such as debt ratio, current ratio, sales to total assets, etc. using logistic regression and classification and regression tree techniques (CART). The proposed study gathers the information of 36 bankrupted firms and 36 non-bankrupted firms based on Tobin Q ratio. The study gathers the necessary information over the period [2005][2006][2007][2008][2009][2010][2011]. The preliminary results indicate that both methods have the capability to predict bankruptcy but with different accuracy. The likelihood of bankruptcy based on CART method were 97.2, 97.2 and 86.1 in the event of bankruptcy, one year before and two years prior to bankruptcy, respectively. These figures were changes to 98.6, 94.4 and 84.7 based on logistic method.