Measuring business failure by using ratio analysis and discriminant analysis: A research on textile, clothes and leather firms listed in the Istanbul Stock Exchange

Predicting business failure of companies has been using the subject of many papers since 1960's and interest in it continued new technological and statistical developments. Due to globalizing, business failure, become more important. Companies try to spread their operations into international markets and get new customers, suppliers, investors and also new competitors from around the World. Therefore, business failure of companies can also affect on other countries' economy that they operate in due to globalizing economic structure. This study includes three sections. The first section covers the concept of business failure, factors that affect business failure, solutions to save companies from business failure, and methods to measure business failure. In the second section, the framework of discriminant analysis is covered and explained why it is employed to measure business failure. In this context, ratio analysis which is a technique of financial statement analysis will be used to supply data for discriminant analysis. The discriminant model that we develop has 92% accuracy. Furthermore, relationships between financial ratios are exhibited in this section. The third section includes analysis and results of discriminant analysis of the companies which operate in textile, clothes and leather sector and are listed in the Istanbul Stock Exchange. In the results and conclusion part, factors that cause business failure for the companies are covered, by considering ratios which have significance on the measurement of business failure. In addition, solutions to save companies from business failure are discussed in this part. In this study, we employed Mann-Whitney U-test which is a function of multi-variable discriminant analysis to find out which financial ratios would have powerful affect to predict the possibility of business failure. As a result, non-current assets/equity, interest coverage ratio, margin of return on operation, return on equity, return on assets and EBIT/Total assets ratios differentiate business failured companies from non-failured companies. Return on asset is the most powerful tool among all of these ratios to find out business failured companies.