Investigation into the Ability of Financial Ratios in Predicting Financial Distress: Logit Analysis

Using multivariate statistical techniques such as logistic regression, we examine the role of accounting data to develop a model for predicting financial distress over a sample of 279 firm-years (104 with financial crisis and 175 with non-financial crisis) listed in Tehran Stock Exchange (TSE) during the period of 1382-1386. The criterion used for determining firms with financial crisis is the article 141 of Commercial code. Ten financial ratios are selected for examination as potential predictors of financial distress. The model is accurate in classifying the total sample correctly with accuracy rate exceeding 84.9 percent. Also, results demonstrate that the models function effectively in predicting financial distress and can be of assistance to auditors, taxation and other state authorities, and the banking system.