How can financial ratios be used to predict bankruptcy?

Question

Quizplus · Accepted Answer

All three of these financial ratios - return on assets (ROA), liabilities to assets ratio, and EBITDA to total liabilities ratio - have been shown to be effective predictors of bankruptcy. In particular, failing firms have consistently demonstrated lower ROA and higher ratios of liabilities to assets in the years leading up to bankruptcy. The EBITDA to total liabilities ratio is another useful metric, as a low ratio suggests that the firm may struggle to pay off its debts. Monitoring these indicators can provide early warning signs of financial distress and allow companies to take corrective action before it's too late.

How Can Financial Ratios Be Used to Predict Bankruptcy