How Can Financial Ratios Be Used to Predict Bankruptcy

question 75

Multiple Choice

How can financial ratios be used to predict bankruptcy?

• A) As early as 4 years before they went bankrupt, failing firms were earning a much lower return on assets (ROA) than firms that survived.
• B) On average, failing firms also had a high ratio of liabilities to assets.
• C) EBITDA (earnings before interest, taxes, depreciation, and amortization) was low relative to the firms' total liabilities.
• D) All of these. In each case, these indicators of the firms' financial health steadily deteriorated as bankruptcy approached.