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Carmem Pereira Leal

UTAD University, Portugal.

Carlos Machado-Santos

UTAD University, Portugal.



This study explores the main characteristics of the business bankruptcy phenomenon. Some financial ratios are analysed in the context of bankruptcy prediction in Portuguese textile industry, using statistical instruments of multivariate analysis, particularly the discriminant analysis and the conditional analysis of probability (logit). Although these models have been frequently used, it must be underlined that the great popularity assigned to financial ratios as indicators of the firmsí financial health, is still evident in some of the most recent research. The results seem to show that financial distress could be anticipated with an accuracy that ranges from 75% to 97%,

three years and one year before bankruptcy respectively. Thus, we believe that if managers, auditors and regulators, paid the necessary attention to the instability exhibited by such indicators, it might be possible to prevent some of the problems revealed in this sector, which experienced a wave of bankruptcy with enormous economic and social impact, especially in the north of the country.

Key Words: Insolvency Prediction; Financial Ratios; Bankruptcy.

JEL Codes: C53, G33, M41.