Abstract
This paper focuses on business financial health evaluation with the use of selected mathematical and statistical methods. The issue of financial health assessment and prediction of business failure is a widely discussed topic across various industries in Slovakia and abroad. The aim of this paper was to formulate a data envelopment analysis (DEA) model and to verify the estimation accuracy of this model in comparison with the logit model. The research was carried out on a sample of companies operating in the field of heat supply in Slovakia. For this sample of businesses, we selected appropriate financial indicators as determinants of bankruptcy. The indicators were selected using related empirical studies, a univariate logit model, and a correlation matrix. In this paper, we applied two main models: the BCC DEA model, processed in DEAFrontier software; and the logit model, processed in Statistica software. We compared the estimation accuracy of the constructed models using error type I and error type II. The main conclusion of the paper is that the DEA method is a suitable alternative in assessing the financial health of businesses from the analyzed sample. In contrast to the logit model, the results of this method are independent of any assumptions.
Highlights
Diagnosing the financial health of a company, as well as predicting its failure, is currently a highly discussed topic
When analyzing the results of the BCC data envelopment analysis (DEA) model, we focused on identifying businesses on the financial health frontier, whereby their efficiency is equal to 1 and all slacks equal 0
Based on the research carried out in this paper, we can conclude that the DEA method is a suitable alternative for assessing the financial health of businesses from analyzed samples
Summary
Diagnosing the financial health of a company, as well as predicting its failure, is currently a highly discussed topic. In order to maintain prosperity and competitiveness, it is extremely important for a company to know the financial situation that it is in. Adequate management decisions cannot be made without detailed analyses of business financial health. An important prerequisite for effective decision-making of business owners is a high-quality, comprehensive, and timely diagnosis, supported by a detailed analysis of adverse phenomena threatening the company’s operations. Based on these results, management of the company can take effective measures to improve the financial situation. In defining the problems that accompany financial distress, some authors tend to focus on negative operating revenues and problems with cash flow [1,2,3]. The term financial distress has as a negative connotation
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