The usefulness of financial ratios in predicting companies failure: a case study of five companies / Rozita Md Husain

Financial statement analysis was developed at the end of the nineteenth century. Its main purpose at that time was to evaluate the solvency position of prospective borrowers. Shortly afterwards the first efforts were made to design models to predict companies failure. The ability to predict company failure is important from both the private and social points of view, since failure is obviously an indication of resource misallocation. An early warning signal of probable failure will enable both management and investors to take appropriate steps such as;- i. Changes in their operating policies ii. Reorganization of their financial structure Therefore it will improve both private and social resource allocation. Financial ratios are usually viewed.as indicators of a company deficiencies, such as poor liquidity or low profitability. Note that financial ratios are not intended to pr-ovide definite answers. Ratios are therefore symptoms of the company's economic condition intended to guide the analyst in his financial investigation.