Predicting the Economic and Financial status of Companies through Financial Ratios Based on Profitability, Cash Flows and Growth

Changeable economic conditions and intense fluctuations in business environment are provided stakeholders to make decision under material uncertainty. In this case, using some models to predict economic and financial performance by identifying effective variables such as profitability, cash flows and growth is very important. From the late recent century, an ample of studies in Accounting and Finance have provided a descriptive approach based on financial ratio analysis. This approach is being reviewed from two fundamental aspects: profitability and financial status. The capability of financial ratios in predicting future financial crisis is being analyzed and compared through this approach and by using the 11 financial ratios. The aim of this paper is to predict firms' financial status using the ratios of profitability, cash flows and growth. So the purpose of this paper is to develop and test the financial performance and risk evaluation approach and to classify the firms into successful and unsuccessful. In this research the Logit Analysis is being used to review/test two groups of firms: bankrupt firms according to Commerce Law article 141, and omitted firms from Stock Exchange according to the decision of Bourse Admission Board. The results indicate that the financial ratios in both samples have the ability to classify them into successful and unsuccessful groups, but the codified model for bankrupt firms according to Commerce Law article 141 in comparison with the omitted firms from Stock Exchange is more accurate.