predicting of firms financial distress by use of linear discriminant function the model

This study investigates the material variables in predicting firms financial distress and bankruptcy and has determined the most important financial variables in predicting firms financial distress. After determining the material variables of bankruptcy the paper provides a model for predicting firms financial distress and bankruptcy for testing the predicting ability of the model. For determining the material variables in predicting of firms financial distress and bankruptcy we use linear discriminant function. A model with and nine ratios as variables is constructed. The nine ratios are earning before interest and taxes to total assets, retained earning to total assets, working capital to total assets, equity capital to total liabilities, earning before interest and taxes to sales, current assets to current liabilities, net income to sales, total liabilities to total assets and firm size. The model’s ability to predict financial distress is investigated by using data of the firms with financial distress and firms without financial distress. Results reveal that the ability of the model in predicting financial distress five years before of firms financial distress is high.