The Road to Bankruptcy: A study on Predicting Financial Distress in Sweden

University essay from Umeå universitet/Företagsekonomi; Umeå universitet/Företagsekonomi

Abstract:

This thesis aims to study whether cash flow ratios can predict corporate financial distress in Sweden by employing multiple discriminant analysis. It was inspired by the Altman Z-score, which was adjusted for this aim. This study adopted a positivist epistemology and objectivist ontology. The research approach taken was a deductive one which employed quantitative methods in testing the hypotheses developed. The hypotheses were tested through means of accuracy and the Independent Samples Test. In order to identify financial distress a proxyratio was adopted. This proxy was the operating cash flow ratio. The sample consisted of 227 firms in total within the retail- and service industries. The time period covered 2000-2013. It was found that the proxy was unable to separate firms into distressed and nondistressedgroups, but rather classified all firms as distressed. Furthermore, the other ratios also failed to do any classification. Therefore, what the question that this study set out to answer came to the conclusion; cash flow ratios cannot predict corporate financial distress for retail and service companies in Sweden.

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