Importance of Cash Flows Ratios to Predict Financial Failure of Libyan Public Industrial Firms
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Importance of Cash Flows Ratios to Predict Financial Failure of Libyan Public Industrial Firms
Prof. Khamoussi Ahmad Halioui
Department of Accounting- College of Economics and administrative Science
Al Imam Mohammad Ibn Saud Islamic University - (KSA)
Ahmed Elsharif Ahmed
Department of Accounting- College of Economic
University of Sirte, Libya
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Abstract:
This study aims at identifying the importance of cash flows ratios to predict financial failure of Libyan public industrial firms . The Multiple Discriminant Analysis is used to identify the best set of cash flow ratios that can discriminate between the failed and non-failed firms . Eleven cash flow ratios were calculated for a sample consisted of ( 16 ) non failed firms and ( 7 ) failed firms, and used in the developed model. The ( 23 ) firms were pair-matched on the basis of industry and asset size for the period between the years ( 1998 – 2006 ) .
The findings show that 3 out of 11 cash flow ratios are significant to predict the failure of Libyan public industrial firms : Cash Coverage Ratio , Net Cash Flow from Operating Activities to Capital Expenditures , and Net Cash Flow from Operating Activities to Revenues. The proposed model enables the re-rating of companies in the sample analysis within the two groups of failed and non-failed companies in the second year before the failure with the accuracy of 73.9%.
Keywords: Financial Failure, Failure Prediction, Cash Flows Ratios, Multiple Discriminant Analysis .