Financial Ratios as Financial Distress Predictors for SME in Czech Republic

Constructing models for predicting financial distress of small and medium enterprises requires its own treatment, because these firms differ from large campanies. The aim of this paper is to quantify the predictive power of selected ratios and to develop a statistical model for financial distress. We tested 16 financial ratios and the study relies on observations from 1563 firms. The model obtained by a methodology of conditional logit analysis includes quick liquidity ratio, average receivables collection period, leverage, solvency and interest coverage or debt coverage from current cash flow. The result confirmed that financial distress is closely related with the ability of a firm to pay its debts. Rentability wasn´t found as so decive predictor in short period, there is a more complicated relation between rentability and payment capacity. As significant predictor was identified current cash flow (adjusted ordinary profit), which is much closely connected with cash.