The prognostic value of financial statements : Detecting business failure using financial ratios?

The research for detecting business failure using financial ratios started in the late 60’s and has been researched in various ways since. Previous researchers suggest that big changes in the macroeconomic environment give the need for updated work on this area. With the latest financial crisis in mind and the fact that very few updated studies have been made on Swedish corporations’ gives reason to as to why this thesis is needed. This study uses a sample of 25 Swedish firms that went bankrupt 2012 or later and 25 healthy ones. The study then inspects the five years prior to failure of all these 50 companies for identifying what financial ratios can be used for detecting failure. For an interesting perspective, five of the failed firm’s textual presentation of their future for the last year prior to failure was also inspected. The findings suggest that financial ratios can be used for detecting failures. Strong indications are found the last year before failure with decreasing indications the more years before failure you look. The findings contribute to society on a practical level supporting stakeholders in their decision making