The Evaluation of the Success Rate of Corporate Failure Prediction in a Five-Year Period

Abstract

The development of bankruptcies in the Czech Republic is closely related to the impact of the global financial economic crisis, which, among other things, has also affected the competitiveness of Czech companies to a great extent. The future state of overall company financial health can be determined through prediction models. This paper discusses the history of financial analysis and the most widely used models, with the main purpose of the paper to compare the accuracy of various prediction models and to decide which model has the highest prediction success rate. The sample consisted of the total of 90 Czech companies, out of which 1/2 were companies in bankruptcy and 1/2 were non-bankrupt companies. Ratio indicators of given models were calculated from balance sheets as well as profit and loss statements for a five-year period. The reliability of the accurate classification of accounting units is verified by a confusion matrix. The highest total success rate of classification was achieved by Zmijevski model, which had the highest predictive value. Another partial objective of the paper is to determine whether the accuracy rate of the bankruptcy models changes with branches within which the companies operate. The hypothesis about differences between the branches is confirmed. The most statistically significant differences were shown between Wholesale and Retail and the Processing Industry, with the results of models varying among different branches. The results show that taking into account the branches the company is operating in is advisable for selecting prediction models.

How Do Entrepreneurs Feel Bankruptcy?

“…An increase in insolvency may affect whether entrepreneurs are more likely to experience bankruptcy while doing business. According to Pech et al (2020), the development of bankruptcy is intertwined with the impact of the financial and economic crisis, while it is noted that bankruptcy of SMEs depends on the type of analyzed activity. From 2013-2014, the number of insolvency cases and the number of bankruptcies in the Czech Republic decreased.…”

Key Ratios for Long-Term Prediction of Hotel Financial Distress and Corporate Default: Survival Analysis for an Economic Stagnation

“…The goal of this work is to underpin the ratio approach as a proper way for anticipating corporate failure in a near future. However, a cross-sectional approach would drive us to similar conclusions, already pointed out by previous studies, for different branches within with companies operate might change the accuracy of the model, as indicated by Pech [23]. Consequently, we selected a quite homogeneous industry not subject to diversification, which is the hotel industry.…”

“…There are a number of ratios mentioned in the literature that could play a different role in this process, and they are specially surveyed by those who, in one way or another, need to foreknow the expected life of any company, such as lenders, insurance companies or public institutions. However, the model used often changes depending on the country [22] or could be influenced by the nature of the activity of the enterprise [23]. Those aspects have been seldom approached by academicians or practitioners, and it is worthwhile bringing forward those who underpinned this issue.…”

“…Moreover, they crossed the ratios and the countries where they are commonly used for calculating financial distress, and it turned out that depending on the country (or political background), the ratios used are different. On a different topic, Pech et al [23] used a well-balanced 60-enterprise sample for analyzing the bankruptcies in the same period of the present study. One of their outcomes was that there were weaker classification systems when the dataset mixes companies from different industries.…”

Financial Analysis as a Basis for Creation of the Financial Plan of the Selected Business Entity – Case Study

“…Financial analysis is an effective tool in the evaluation of a company's financial efficiency on the basis of data from financial reports, where the individual data are sorted, aggregated and measured reciprocally [5]. Any financial decision-making must be supported with a financial analysis, the result of which forms the basis for management strategies of the company's structure, investment and pricing policy, stock management, etc.…”