Risk of Bankruptcy, Its Determinants and Models

Abstract

In this paper, the following research problem was addressed: Is DEA (Data Envelopment Analysis) method a suitable alternative to Altman model in predicting the risk of bankruptcy? Based on the above-mentioned research problem, we formulated the aim of the paper: To apply DEA method for predicting the risk of bankruptcy and to compare its results with the results of Altman model. The research problem and the aim of the paper follow the research of authors aimed at the application of methods which are appropriate for measuring business financial health, performance and competitiveness as well as for predicting the risk of bankruptcy. To address the problem, the following methods were applied: financial ratios, Altman model for private non-manufacturing firms and DEA method. When applying DEA method, we formulated input-oriented DEA CCR model. We found that DEA method is an appropriate alternative to Altman model in predicting the risk of possible business bankruptcy. The important conclusion is that DEA allows us to apply not only outputs but also inputs. Since prediction models do not include these indicators, DEA method appears to be the right choice. We recommend, especially for Slovak companies, to apply cost ratio when calculating risk of bankruptcy.

The Enterprise Economic Security System: The State Assessment Using Management Functional Types

“…Estimation in economic security science on the basis of game theory allows determining the point (points) of maximum balancing of the interests of each participant (in the form of extremes of the amounts of assessments of the interests of each game participant) (Rudnichenko et al, 2019;Varela-Vaca, Gasca, 2015;Yu et al, 2014). The approaches based on the assessment of the probability of bankruptcy include (Aleksanyan & Huiban, 2016;Horváthová & Mokrišová, 2018;Rudnichenko et al, 2018;Tereschenko, 2006): discriminatory models of Altman, Chesser, Taffler, Lees, Connan, Golder, Tereshchenko, based on the construction of a multifactorial discriminatory model as the main safety indicator;methods based on the determination of average values are based on the determination of the financial and economic condition of economic entities are depending on the value of the weighted average deviation of the actual values of indicators of liquidity, solvency and financial stability from their normative values;the Beaver model provides for estimating the probability of bankruptcy of an enterprise depending on the value of five key financial economic indicators: Beaver's ratio; current liquidity ratio; return on assets; financial leverage; the ratio of working capital to current assets;the coefficient of financing of illiquid assets -the solvency of the company is determined basing on the degree of provision of illiquid assets (non-current assets and stocks) by own and borrowed sources of financing. The model reflects the asset financing policy maintained by the enterprise (conservative, moderate, aggressive or too aggressive).…”

Bankruptcy Prediction with the Use of Data Envelopment Analysis: An Empirical Study of Slovak Businesses

“…Another method used in the area of bankruptcy prediction is DEA (Horváthová and Mokrišová 2018). Compared to statistical methods, DEA is a relatively new, non-parametric method, which represents one of the main possible approaches to assessing the financial health of a business and its risk of bankruptcy (Štefko et al 2018).…”

Comparison of the Results of a Data Envelopment Analysis Model and Logit Model in Assessing Business Financial Health

“…The authors of [46] or [47] were the first to apply linear programming to predict financial health. One of the methods based on mathematical programming is the DEA method [48]. Compared to statistical methods, DEA is a relatively new, non-parametric method, which represents one of the possible approaches to assessing the financial health of a businesses and its risk of bankruptcy [49].…”