The Prediction Of Company Failure Using Financial And Non-Financial Information - Essay Example

Studies have shown that financial difficulty arise mainly due to as a result of series of errors and misjudgment on the part of management. Moreover, interrelated weakness can also be attributed to management. Ratio analysis can be used to predict whether a firm will go bankrupt or not, because the sign of potential financial distress are generally evident in a ratio analysis long before the firm actually fails. How often businesses fail in United States? A good number of businesses fail each year.

One thing is very important to note here that the failure rate per 1,000 businesses fluctuates depending upon the economy, but the average liability tended to increase over time. Though business failure is more common among smaller firms, large firms are not immune to it. But, some firms are too important or too big to be allowed to fail. So governmental intervention or mergers are often used as methods to avoid failure. For example, the US government gave aid to Chrysler in the 1980s to avoid its failure.

Another example is that of merger of Goodbody company with Merril Lynch to avoid the former’s bankruptcy which would have frozen the accounts of 2, 25,000 customers while bankruptcy settlement was being worked out. WorldCom, Enron, Kmart, Global Crossing, Arthur Andersen, Polaroid, Qwest and Xerox are a few of the reputed companies which failed. Some of the above mentioned companies are fortune 500 companies that were not supposed to collapse. The question to be answered is “why companies fail?

” Market turbulence, bad economy, a weak dollar, competitive subterfuge forces etc are some of the readymade answers which a CEO of the failed company would generally offer. A company can fail due to both financial and non financial reasons. Some of the financial reasons for company failure are low liquidity, low profitability, lower value of shares, inability to meet current debts, high ratio of loan capital compared to equity