Using cash flow analysis to identify probability of bankruptcy risk

Original title: Using cash flow analysis to identify probability of bankruptcy risk

The purpose of this research is to examine the efficiency of cash flow metrics for forecasting the probability of bankruptcy of companies. Through a logistic regression model, information from 58 companies with severe financial problems was analyzed for a period of four years prior the date on which they presented financial distress, and compared with information from 54 healthy companies for the period from 2015 to 2019. The results indicate that 5 of the 10 metrics analyzed are efficient predictors of the probability of bankruptcy, with a percentage of correct prediction of 80.62% of the cases. Likewise, it was determined that healthy and financially distressed companies present flow metrics statistically different from each other in most of the analyzed metrics, so the results of this study demonstrate that cash flow metrics are a reliable tool in forecasting the financial distress probability in the context of Mexico.