Financial Failure Case Study

2333 Words10 Pages
The Symptoms of Failure in Financial Distress The early prediction of distress is essentially for investors or lending institutions who wish to protect their financial investments. As a consequence, modelling, prediction and classification of companies to determine if they are potential candidates for financial distress. Corporate bankruptcy was first modelled, classified and predicted by Beaver in 1966. His technique accurately classified 78% of the companies five years prior to failure. Some of the companies may only just be survive corporate failure, but are actually classified as “non-failed” companies. Some companies may strategically file for bankruptcy to eliminate rising debts. Other companies may file for bankruptcy due to “acts of…show more content…
The operational definition of failure, used in this study, was the ability to pay debts as they become due, entrance into the bankruptcy or explicit agreement with creditors to reduce debts. A theory of symptoms of failure focuses on how the behavior of fundamental economic variables would be expected to be portrayed in financial statements. The FCM addresses this uncertainty by clarifying one important step in the assessment of that probability, which is an empirical analysis of the financial and market data usually presented in the Failing Company cases. FCM is constructed with the reference to the three common denominators underlying the cash flow framework, which are liquidity, profitability, and variability. The quick flow ratio relates to the reservoir size and resource inflow to resource outflow. Net quick assets indicates the relationship of both the current liabilities and inventory to the highly quick asset like cash, plus notes receivable. Cash flow/total liabilities relates resource inflow to total claims. The profitability measure, rate of return to common stockholders, reflects all of the elements of the cash-flow

More about Financial Failure Case Study

Open Document