The use of accounting and financial ratios to predict failure: The case of Jordan

The study aimed to use the financial performance of Jordanian companies in order to predict financial failure. To achieve this, financial ratios were applied. Data was collected from selected companies through an analysis of relevant documents as well as through interviews with senior management in industrial companies operating in Jordan. The findings indicate that there are essentially four ratios that could explain and predict financial performance of a company in the Jordanian setting; these are a ratio of current assets to total assets, a ratio of debtors to sales, a ratio of net profit before interest and tax to current liabilities, and a ratio of the market value of capital-to-book value of the total debt, the latter of which appears to be the most important ratio. Following this, a model comprising three financial ratios that are deemed the strongest influence, based on their statistical significance, was constructed, and this model was used to rerate a sample of successful and failed food companies. The constructed model was able to distinguish between successful and failed companies, as follows: D1=0.416*X25-0.001*X21+0.004*X19-1.943 D2=-1.720*X25+0.028*X21+0.459*X19-11.183 Thus, the paper's contribution is the constructed model that could be employed by potential investors and other stakeholders in order to predict failure.