Financial Ratios and Corporate Failure: Evidence from Nigerian Listed Manufacturing Firms

Abstract

This paper examines the effectiveness of financial ratios in predicting corporate failure among listed manufacturing firms in Nigeria. The paper utilized secondary data collected from annual reports of the sampled firms for the period 2012 – 2018. Twenty firms were selected through a non-probabilistic sampling technique in the form of convenience sampling technique. The sample firms consist of ten failed and ten Non-failed firms. The analysis was performed using the multiple discriminant analysis models run on SPSS version 21. Six financial ratios out of the eighteen earlier selected as predictors of failure emerge as the best predictors. Specifically, the findings of the study reveals that Earnings Before Interest and Tax to Total Assets (EBITA), Working Capital to Total Assets (WCTA), Current Liabilities to Total Assets (CLTA), Market Value of Equity to Book Value of Debt (MVEBVD) contributed most in predicting corporate failure. Cross-validation test shows 76.4% prediction accuracy of the discriminant function model. The study concluded that, univariate descriptive analysis is crucial in generating the most significant single failure predictor to predict the possibility of failure or to provide a warning signal for imminent failure. Based on the findings, the study recommends management to compute financial ratios regularly and made use of by listed manufacturing firms in Nigeria in assessing their financial health and sound decision making. Policymakers and regulatory authorities such as Central Bank of Nigeria and the Nigerian Stock Exchange should develop an early warning system sign of corporate failure to avoid corporate failure.