Which one of these statements is correct regarding ratio analysis as a predictor of bankruptcy?
A) As early as four years before they went bankrupt, failing firms were earning a higher return on assets than firms that survived.
B) On average, failing firms have a lower ratio of liabilities to assets than surviving firms.
C) Failing firms have a lower EBITDA to total liabilities ratio than surviving firms.
D)Firms with a total debt to total assets ratio of 75% or less tend to survive rather than fail.

Question

Quizplus · Accepted Answer

Studies have shown that failing firms tend to have lower EBITDA to total liabilities ratios compared to surviving firms, making choice C correct. Choices A and B are false as failing firms tend to have lower returns on assets and higher ratios of liabilities to assets. Choice D is partially true, as firms with lower total debt to total assets ratios have a better chance of survival, but the specific threshold of 75% is not necessarily accurate.

Which One of These Statements Is Correct Regarding Ratio Analysis