Prediction of financial distress companies in the consumer products sector in Malaysia

Abstract

This study attempts to predict financial distress companies in the consumer products sector in Malaysia using financial distress companies as the dependent variable and financial ratios as the independent variables. Logit Analysis was used as the analysis procedure because financial ratios do not have to be normal if it is used. It is also suitable when the dependent variable is binary in nature. Furthermore, it can also provide the probability of a company being financially distress. In addition, it can also provide us with the sign of the independent variable(s). This study found that the independent variables that can be used to predict financial distress companies in the consumer products sector in Malaysia were debt ratio, total assets turnover ratio and working capital ratio. The findings from the internal validation showed that the prediction model provided a more than 50% chance that the model is accurate for five years before distress. Furthermore, the findings from the external validation showed that the model might be able to be used outside the estimation time period because the overall percentage accuracy were higher than 50% for five years before distress.