Predicting Indian SME financial distress: an ex-ante approach

Abstract

Purpose The purpose of this study is to propose a financial distress prediction (FDP) model and method suitable for listed Indian small and medium enterprises (SMEs). Design/methodology/approach A three-part screening criteria similar to Platt and Platt (2006) was tested independently and jointly on Indian SMEs using statistically significant financial variables. Five stepwise multiple discriminant analysis (MDA) models were developed and the best-performing model was further compared against seminal models to check for robustness. Findings Model C2 developed under Criterion C which stated “if net income before special items is negative in any given year the firm is considered as ‘unwell’” proved robust and effective. Originality/value The proposed model identifies the importance of profitability and efficiency ratios over leverage ratios in determining financial distress and therefore, has implications for SME owners/managers and shareholders.