Prediction of Financial Distress and Insolvency for Industrial Firm (Case Study)

Dr. Ahmed Alrawi


This paper aims to redress some of the incorrect decisions practiced by management in ''Al-Hayat Firm for Manufacturing Durable Products'', for the period (2013-2015) bringing the firm to the edge of collapse.  In this paper, the focus lies on the benefits of the financial analysis in the economy to help the decision makers become more aware and how to gain a competitive advantage for their firms. The aim of this paper also is to shed light on the negligence practices in some firms and the associated problems of a financial analysis system implementation.

The evidences suggest that the firm suffered a heavy burden of debts and going bankrupt in the near future. Financial ratio's analysis has been used to assess profitability and risk of the concerning firm. In liquidity ratios the percentage of the working capital is less than (1), indicate the increase in the liabilities over the assists. In the leverage ratios the total liabilities to total assets was increased from (38.69%) to (53.73%). In the activity ratios the inventory turnover decreased by (1.10 times) through the given period. In the profitability ratios the net profit to total sales became negative amount to (-80.01%) from (-33.61%) for the same period. Also, the net profit to total assets percentage declining to (-9.29%, -2.10%) in the given period, and the stock book value declined from (85$) to (57$), through the given period.

The researcher used one of the different measure used to predict the firm's insolvency and probably its bankrupt (i.e. Altman, Z-score analysis). The study result indicated the weakness of ''Al-Hayat Firm for Manufacturing Durable Products'' for the period (2013-2015). In calculating the ''Altman, Z-score'' the result suggest that (Z) value for the given period was less than 1.81, (Z-score <1.8).

The main features give a gloomy picture and inefficiency of firm's financial position


Insolvency, Financial analysis, Industrial firm, financial reporting, Working capital

Full Text:



Altman, I., (1968), Financial Ratios. Discriminant Analysis and the prediction of Corporate Bankruptcy, Journal of Finance, Vol. 23, No. 4, P.592.

Horne, V., and James, C., (1998), Financial Market Rates and Flows, 5th E prentice Hall, p. 25.

Julie, M., (2002), Insolvency and Tests of Insolvency: An Analysis of the “Balance Sheet” and” Cash flow” Tests, Australian Accounting Review, Vol. 12, No.27, pp.59–72.

Ke, W., et al, (2014), Efficiency measures of the Chinese commercial banking system using an additive two-stage DEA, Omega, Vol. 44, p.5-20.

Kolenikov, S., and Angeles, G., (2009), socioeconomic status measurement with discrete proxy variables: is principal component analysis a reliable answer? Review of Income and Wealth, Vol. 55, No.1, pp.128–165.

Matthews, K., (2013), Risk management and managerial efficiency in Chinese banks: a network DEA framework, Omega, Vol. 41, pp. 207-215.

Mabwe, K., (2010), African Review of Economics and Finance - A financial ratio analysis of commercial bank performance in South Africa, African Review of Economics and Finance, Vol. 2, No. 1, pp. 30 – 53.

Necmh, A., (2011), Association of DEA super-efficiency estimates with financial ratios: Investigating the case for Chinese banks, Omega, Vol.39. No. 3, p. 323-334.

Sean, H., et al.,(2011), Identification of fraudulent financial statements using linguistic credibility analysis, Decision Support Systems, Vol. 50, No. 3, pp. 585-594.

Samuels, J., et al., (1995), Financial Statement Analysis in Europe, Chapman and Hall, London, P.8.

Taffler, J., (1982), Forecasting Company Failure in U.K using discriminant analysis and financial ratio data, Journal of the Royal Statistical Society, Vol.145, No. 3, P. 345.


  • There are currently no refbacks.