Evidence of Predicting Early Signs of Corporate Bankruptcy Using Financial Ratios in the Indian Landscape

TL;DR

This study develops a logistic regression model using financial ratios to predict early signs of bankruptcy in Indian public companies, achieving over 81% accuracy one year prior and over 85% two years prior to bankruptcy filings.

Contribution

It introduces a predictive model tailored for the Indian corporate landscape, demonstrating high accuracy in early bankruptcy prediction using financial ratios.

Findings

Model accuracy of 81.4% one year before bankruptcy

Model accuracy of 85.1% two years before bankruptcy

Financial ratios effectively predict bankruptcy in Indian firms

Abstract

Corporate bankruptcy impacts the functioning of the economy as it impacts its various stakeholders: Shareholders, financial and operational lenders, and the government. This paper aims to study the impact of a wide array of profitability, leverage and efficiency ratios to predict early signs of bankruptcy in public listed companies in India using a logistic regression considering impacts at two levels: one year and two years before the filing of bankruptcy with the NCLT during the year 2019. The study proves that the accuracies of the classification model are 81.4% and 85.1% respectively for one year and two years before the bankruptcy.