Using financial ratios to develop a bankruptcy model for private limited companies in Hong Kong

Pao Yue-kong Library Electronic Theses Database

Using financial ratios to develop a bankruptcy model for private limited companies in Hong Kong

 

Author: Ng, Kam-chuen Paul
Title: Using financial ratios to develop a bankruptcy model for private limited companies in Hong Kong
Degree: M.B.A.
Year: 1997
Subject: Private companies -- China -- Hong Kong
Bankruptcy -- China -- Hong Kong
Ratio analysis
Hong Kong Polytechnic University -- Dissertations
Department: Dept. of Management
Pages: v, 183 leaves ; 30 cm
Language: English
InnoPac Record: http://library.polyu.edu.hk/record=b1397970
URI: http://theses.lib.polyu.edu.hk/handle/200/680
Abstract: The use of private company data to generate the bankruptcy classification model presented in this study makes the model applicable to the needs of financial institutions, accounting firms, portfolio managers, and others when they analyze the solvency of private companies. Using a combination of two techniques - Financial Ratio Analysis and Multiple Discriminant Analysis, the model is made of 14 variables measuring four distinct categories of financial structure of a company. The model is rather accurate in distinguishing between bankrupt and healthy companies. It correctly classifies 82% of companies one year prior to bankruptcy and 70% of the companies two years prior to bankruptcy. It is to be mentioned that when tested by the holdout sample, the model demonstrates its satisfactory predictive ability with an accuracy rate of 80%. The model, however, should not be used by itself. Clearly, a bank credit officer's analysis and judgement of total situation related to a private company are the determining factors in making the loan decision. Likewise, the auditor's judgement is the key factor in making the going concern decision as is the judgement of the portfolio manager in making the investment decision.

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