Financial Distress and Ratios Informative Capability: Empirical Evidence from the Italian Food & Beverage Industry

Abstract

This paper analyses and compares the informative capability of diffused financial ratios to point out future financial distress. A panel of 76 Italian food and beverage firms (6 bankrupt and 70 non bankrupt, from 1997 to 2001) was utilized and a set of 11 relevant financial ratios was investigated. Two fundamental dimensions are considered: the profitability one (e.g. earnings, cash flows and growth), and the financial one (e.g. capital structure, debt level, liquidity). The analysis was carried out using a classification approach based on benchmarking and implementing ROC curves method. The evidence shows that there are not significant differences in terms of informative capability between a linear combination of ratios concerning financial dimension, and a linear combination of ratios concerning growth, profitability and cash flows.