Predicting Financial Distress of Companies Using Financial Ratios

Krishna Ladhani, 23COMG08, BCom VI Sem G, Department of Commerce, Kristu Jayanti University, Bengaluru, India

Financial distress refers to a situation in which a company faces difficulty meeting its financial obligations due to weak liquidity, declining profitability, or excessive leverage. Early identification of financial distress is crucial for stakeholders, including investors, lenders, management, and regulators, as it enables timely corrective actions and risk mitigation. Financial ratios derived from published financial statements serve as reliable indicators of a firm’s financial health, as they summarize complex financial data into meaningful and comparable measures.

This study analyzes key financial ratios—including liquidity, profitability, leverage, and efficiency ratios—to predict the likelihood of financial distress in companies. By examining trends and patterns in these ratios over time, the study aims to identify early warning signals of financial failure. Analytical tools and statistical techniques are applied to assess the relationship between financial ratios and corporate distress, enabling the distinction between financially stable firms and those in distress.

The findings of this analysis are expected to contribute to more informed decision-making in financial management and investment evaluation. By using financial ratios as predictive tools, organizations can strengthen financial planning, improve risk assessment, and enhance long-term sustainability. The study also highlights the importance of data-driven approaches in modern financial analysis, demonstrating how business analytics can be effectively applied to anticipate financial challenges and support strategic business decisions.

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