SOLVENCY RATIO AS A TOOL FOR BANKRUPTCY PREDICTION

Abstract

The current study evaluates the potential of the solvency ratio in predicting corporate bankruptcy. The research is focused on Romania and, in particular, on Timis County.

The interest for the solvency ratio was based on the recommendations of the scientific literature, as well as on the availability of information concerning its values to all stakeholders.

The event on which the research was focused was represented by the manifestation of bankruptcy 2 years after the date of the financial statements of reference. All tests were performed over 2 paired samples of 1176 companies in total.

The methodology employed in evaluating the potential of the solvency ratio was based on the Area Under the ROC Curve (0.646) and the general accuracy ensured by the ratio (64.5% out-of-sample accuracy). The results confirm the practical utility of the solvency ratio in the prediction of bankruptcy.