THE POTENTIAL OF THE DEBT RATIO IN THE PREDICTION OF CORPORATE BANKRUPTCY
THE POTENTIAL OF THE DEBT RATIO IN THE PREDICTION OF CORPORATE BANKRUPTCY

Summary/Abstract: The current study evaluates the potential of the debt ratio in predicting corporate bankruptcy. The population subjected to the analysis included all companies form Timis County with yearly sales of over 2200 Euros. The interest for the debt ratio was based on the recommendations of the scientific literature, as well as on the availability of information concerning its values to all stakeholders. The event on which the research was focused was represented by the manifestation of bankruptcy 2 years after the date of the financial statements of reference. All tests were performed over a paired sample of 1424 companies. The methodology employed in evaluating the potential of the debt ratio was based on the general accuracy ensured by the ratio (61.8%) and the Area under the ROC Curve (0.644). The results suggest limited practical utility of the debt ratio in the prediction of bankruptcy within a simple univariate analysis. This conclusion shows that, although the general belief is that high debt ratios are the main cause of corporate bankruptcy, the use of the debt ratio alone for the prediction of corporate bankruptcy leads to relatively poor results. It is expected that the inclusion of the debt ratio within multivariate models for bankruptcy prediction would exploit its potential more fully.

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