Remaining Financially Healthy and Competitive: The Role of Financial Predictors

Abstract

Financial ratios play an important role in revealing corporate financial soundness, a role which helps to maintain the competitive position of an enterprise, with the achievement of stable development contributing to the elimination of potential financial risks. This paper aims to analyse and compare financial ratios used in the models of transition countries. The analysis focuses on the prediction of the future financial development of a particular enterprise as well as the determination of potential dependencies among the nation in consideration of financial ratios and country of origin. More than 400 prediction models of the Slovak Republic, the Czech Republic, Poland, Hungary, Romania, Lithuania, Latvia, Estonia, Croatia, Russia, Ukraine and Belarus were analysed. The crucial significance of financial ratios in divergent conditions is revealed using a cluster analysis, categorical data and a correspondence analysis. The cluster analysis identified similarities among three groups of countries: i) Belarus, Estonia, Croatia and Latvia; ii) Lithuania, Russia, Hungary and Ukraine, and iii) Czech Republic, Slovakia, Romania and Poland. The results of the correspondence analysis indicate that the individual groups of countries prefer different financial ratios in developing models of prediction of financial distress, differences which arose as a consequence of common changing political, market and economic conditions within each group of nations. In contrary to results suggested by our findings, the most frequently used financial ratios in the prediction models throughout the countries remain current ratio, total-liabilities-to-total-assets ratio, and total-sales-to-total-assets ratio.

Keywords

• competitiveness
• bankruptcy prediction
• financial distress
• financial ratio
• eastern european countries