Predicting Corporate Financial Troubles With Accounting Ratios : Evidence from Nigeria

Irrespective of size many firms often get into financial trouble at one time or the other and no nation is immuned from financial trouble for its enterprises. The literature is replace with the warning signs to look for its corporations heading for financial trouble - the threat is normally of more frightening than the problem itself. Though E. Altman developed a quick, inexpensive model to predict corporate failure (at least two periods is advance), the analysis does not provide unqualified results - the original 5 ratio model has been reused to 4 ratios which are found to be study as powerfully predictive.The authors study, (with a sample of fifty firms in Nigeria), though exploratory, is an attempt to assess the vitality of certain financial ratios in the Nigerian context to work towards an early warning system for individual firms in Nigeria. The authors empirical research study reveals that R2, the ratio of earnings before interest and taxes (EBIT) to sales and R3, EBIT to total assets have the strongest ability to predict impending financial difficulties whereas, the ratio of retained earnings to total assets is weakest. In sum, R2 and R3 financial ratios, the study reveals could provide at least four years prior warning