The Problem of Bankruptcy in Listed Companies

Abstract

Purpose: The paper presents an investigation of the bankruptcy of companies listed on the Warsaw Stock Exchange using the Fundamental Power Index in dynamic terms (FPI). Design/Methodology/Approach: The methodology of the Fundamental Power Index (FPI) was used to assess bankruptcy. In general, the essence of the indicator is a synthetic assessment of the company's fundamental strength. The indicator can take high and low values. The appearance of low levels of the ratio for the company is not favourable and indicates a problem in the financial standing area. As a consequence, the level of the ratio may signal a risk of bankruptcy. The article also discusses the legal grounds for bankruptcy of companies in Poland and selected EU countries. Findings: The results of the conducted research indicate that FPI may be a useful tool of early warning against bankruptcy. The dynamic approach to the index allowed for the assessment of the fundamental strength of the companies in the period of five years. At the same time, the level of the index indicated the risk of bankruptcy. The basis for the construction of the ratio was the financial data from the financial statements of the examined entities. In particular, information on financial ratios from the following groups was used: liquidity, profitability, debt and operational efficiency. Practical Implications: The implementation of the indicator concerns many areas, including investing, assessment of companies or the stock market. In the event of bankruptcy, information about the level of the ratio may support the management process of the company and early response of managers to avoid bankruptcy (e.g. by introducing recovery or restructuring programs). For the investor, the information about the low level of the ratio is a signal for actions related to risk management. Originality/Value: The results of the study reflect the applicability and effectiveness of the proposed indicator. Consequently, the fundamental strength index may constitute an alternative to the existing methods of assessing the bankruptcy process in enterprises.