Financial Statement Analysis and the Prediction of Financial Distress

Failure prediction from the investors’ view by using financial ratios. Lesson from Romania

“…It goes without saying that the fi nancial information from the fi nancial and accounting status is designed to highlight the company's fi nancial condition. Moreover, several studies conducted by Beaver, Correia and McNichols (2010) highlight that "the fi nancial statements have been used for more than 100 years to assess fi nancial distress' likelihood". From the fi nancial information's category, fi nancial rates are the most commonly used in bankruptcy risk assessment because it is believed that their use compared to that of the indicators' absolute levels provides a general degree of applicability for the companies.…”

Who Uses Financial Reports and for What Purpose? Evidence from Capital Providers

“…Subsequent research confirms the usefulness of accounting ratios in predicting distress (Altman, 1968;Ohlson, 1980;Shumway, 2001;Taffler, 1983;Zmijewski;. Beaver et al (2005Beaver et al ( , 2010 summarize this literature and show that the three key ratios are: 1) ROA (profitability of assets); 2) EBITDA to total liabilities (ability of cash flow to service the payments); and 3) Total liabilities to total assets (a measure of assets available to repay debt).…”

“…These studies use market value-based variables, 7 and challenge the accuracy of accounting models on the grounds that distress prediction is concerned with the likelihood of future events and financial statements measure past performance, are formulated under the going-concern principle (limiting their ability to assess distress), are less timely than other sources of information and do not provide estimates of volatility. Which models perform best is still unresolved Hillegeist, Keating, Cram and Lundstedt, 2004), but the work of Beaver et al (2010) suggests that the information not reflected in accounting adds little explanatory power.…”

Analysis of investment appeal of the industrial enterprise by eigenstate method

“…Beaver et al [8] find that the financial strength of the firm can be assessed by return on assets (EBIT to total assets), the ability of cash flow from operations pre-interest and pre-taxes to service the principal and interest payments, EBITDA to total liabilities, and leverage (total liabilities to total assets) allowing to predict up to five years prior to the critical event.…”