European Financial and Accounting Journal
European Financial and Accounting Journal
European Financial and Accounting Journal
Faculty of Finance and Accounting, University of Economics, Prague

European Financial and Accounting Journal 2017/2

EBITDA vs. Cash Flows in Bankruptcy Prediction on the Polish Capital Market

DOI: https://doi.org/10.18267/j.efaj.183

[full text (PDF)]

Welc Jacek

One of the elements of company’s evaluation is an analysis of bankruptcy risk metrics. In this study, the accuracy of bankruptcy predictions generated by EBITDA-based and cash flow-based liabilities-coverage ratios is evaluated within a sample of data from the Polish market. The study is based on a sample of 92 companies, in which case a bankruptcy filing was announced in a period between the beginning of 2009 and the end of the first half of 2016. The statistical analysis has confirmed the usefulness of the investigated liabilities-coverage ratios. Even though the sample covers wide variety of businesses, the logit models with only one ratio used as an explanatory variable are capable of identifying bankrupt firms (with one-period-ahead forecast horizon) in about 66-76% of cases. However, this research has not confirmed the supremacy of operating cash flows over EBITDA in predicting financial distress.

Keywords: Ratio analysis, Bankruptcy prediction, EBITDA, Fundamental analysis, Operating cash flows

JEL Classification: G32, G33

References:

Bancel, F., Mittoo, U. R., 2014. The Gap Between Theory and Practice of Firm Valuation: Survey of European Valuation Experts. Journal of Applied Corporate Finance 26, 106-117. DOI: 10.2139/ssrn.2420380.

Beatty, A., Cheng, L., Zach, T., 2015. Non-Recurring Items in Debt Contracts. SSRN Electronic Journal. DOI: 10.2139/ssrn.2595800.

Beatty, A., Dichev, I. D., Weber, J., 2012. The role and characteristics of accounting-based performance pricing in private debt contracts. SSRN Electronic Journal. DOI: 10.2139/ssrn.318399.

Begley, T., 2013. The Real Costs of Corporate Credit Ratings. Working Paper No. 1230. Ross School of Business. DOI: 10.2139/ssrn.2404290.

Bhandari, S., Iyer, R., 2013. Predicting Business Failure Using Cash Flow Statement Based Measures. Managerial Finance 7, 667-676. DOI: 10.1108/03074351311323455.

Casey, C., Bartczak, N., 1985. Using Operating Cash Flow Data to Predict Financial Distress: Some Extensions. Journal of Accounting Research 1, 384-401. DOI: 10.2307/2490926.

Demerjian, P., 2009. Information, Monitoring, and Manipulation: The Economic Role of Covenant Measurement. SSRN Electronic Journal. DOI: 10.2139/ssrn.1463482.

Demiroglu, C., James, C., 2010. The Information Content of Bank Loan Covenants. The Review of Financial Studies 10, 3700-3737. DOI: 10.1093/rfs/hhq054.

Epstein, L., 2009. The Complete Idiot’s Guide to Value Investing. Penguin Group, New York.

Fan, Y., Thomas, W. B., Yu, X., 2016. The Impact of Financial Covenants in Private Loan Contracts on Classification Shifting. SSRN Electronic Journal. DOI: 10.2139/ssrn.2675191.

Fernandez, P., 2002. Valuation Using Multiples. How Do Analysts Reach Their Conclusions? Valuation Methods and Shareholder Value Creation, 145-167. DOI: 10.1016/b978-012253841-4.50021-4.

Fridson, M., Alvarez, F., 2002. Financial Statement Analysis. A Practitioner’s Guide. John Wiley & Sons, New York.

Gentry, J. A., Newbold, P., Whitford, D. T., 1985. Predicting Bankruptcy: If Cash Flow’s Not the Bottom Line, What Is? Financial Analyst Journal 5, 47-58. DOI: 10.2469/faj.v41.n5.47.

Gray, W., Vogel, J., 2012. Analyzing Valuation Measures: A Performance Horse-Race Over the Past 40 Years. SSRN Electronic Journal. DOI: 10.2139/ssrn.1970693.

Greenwald, B. C. N., Kahn, J., Sonkin, P. D., Van Biema, M., 2001. Value Investing. From Graham to Buffett and Beyond. John Wiley & Sons, New York.

Gupta, J., Wilson, N., Gregoriou, A., Healy, J., 2014. The Value of Operating Cash Flow in Modeling Credit Risk for SMEs. Applied Financial Economics 9, 649-660. DOI: 10.1080/09603107.2014.896979.

Hughen, J.C., Strauss, J., 2016. Portfolio Allocations Using Fundamental Ratios: Are Profitability Measures Effective in Selecting Firms and Sectors? SSRN Electronic Journal. DOI: 10.2139/ssrn.2699948.

Isidro, H., Marques, A., 2008. Non-GAAP Financial Disclosures: Evidence from European firms’ press releases. SSRN Electronic Journal. DOI: 10.2139/ssrn.1266667.

Khan, A. H., Guruli, M. R., 2015. Predicting Bankruptcy by Liquidity Ratios Analysis. Journal UMP Social Sciences and Technology Management 3, 372-380.

Li, N., 2016. Performance Measures in Earnings-Based Financial Covenants in Debt Contracts. Journal of Accounting Research 4, 1149-1186. DOI: 10.1111/1475-679x.12125.

Lie, H., Lie, E., 2002. Multiples Used to Estimate Corporate Value. Financial Analyst Journal 2, 44-54. DOI: 10.2469/faj.v58.n2.2522.

Mulford, C. W., Comiskey, E. E., 2002. The Financial Numbers Game. Detecting Creative Accounting Practices. John Wiley & Sons, New York.

Mulford, C. W., Comiskey, E. E., 2005. Creative Cash Flow Reporting. Uncovering Sustainable Financial Performance. John Wiley & Sons, Hoboken.

Ohlson, J. A., 1980. Financial Ratios and the Probabilistic Prediction of Bankruptcy. Journal of Accounting Research 1, 109-131. DOI: 10.2307/2490395.

Palepu, K. G., Healy, P. M., Bernard, V. L., 2004. Business Analysis & Valuation Using Financial Statements. Thomson South-Western, Mason.

Parrino, R., Kidwell, D., 2009. Fundamentals of Corporate Finance. John Wiley & Sons, Hoboken.

Penman, S. H., 2007. Financial Statement Analysis and Security Valuation. McGraw-Hill, New York.

Rozenbaum, O., 2014. EBITDA Disclosure and Overinvestment in Capital. SSRN Electronic Journal. DOI: 10.2139/ssrn.2543934.

Unegbu, A., Adefila, J., 2013. Efficacy Assessments of Z-Score and Operating Cash Flow Insolvency Predictive Models. Open Journal of Accounting 3, 53-78. DOI: 10.4236/ojacct.2013.23009.

Verninmen, P., Quiry, P., Dallocchio, M., Le Fur, Y., Salvi, A., 2005. Corporate Finance Theory and Practice. John Wiley & Sons, Chichester.

Ward, T. J., Foster, B. P., 1997. A Note on Selecting a Response Measure for Financial Distress. Journal of Business Finance and Accounting 6, 869-879. DOI: 10.1111/1468-5957.00138.

White, G. I., Sondhi, A. C., Fried, D., 2003. The Analysis and Use of Financial Statements. John Wiley & Sons, Hoboken.

Zhang, W., 2008. Real Activities Manipulation to Meet Analysts’ Cash Flow Forecasts. SSRN Electronic Journal. DOI: 10.2139/ssrn.1013228.

Current issue

2/2017

Articles

Ncedo Cameron Xhala, Juraj Nemec, Kahilu Kajimo-Shakantu
The Breadth of Success and Failure Factors with PPPs Implementation

Bohumil Král, Grzegorz Mikołajewicz, Jarosław Nowicki, Libuše Šoljaková
Professional Competences of Controllers: The Case of Poland

Jan Tecl
Labor Taxes and Decision about FDI in the EU

Néstor Lázaro-Gutiérrez, Irene Barainca-Vicinay, Ana Bilbao-Goyoaga
Who Said Accounting Was Boring? Let’s Play Cards. The DAC Project

Tatiana Dolgikh
Does the Auditor Have a Direct Influence on the Financial Statement Quality?

Welc Jacek
EBITDA vs. Cash Flows in Bankruptcy Prediction on the Polish Capital Market