Kliestik, T., Valaskova, K., Lazaroiu, G., Kovacova, M., & Vrbka, J. (2020).

Remaining Financially
Healthy and Competitive: The Role of Financial Predictors. Journal of Competitiveness, 12(1), 74–92.
https://doi.org/10.7441/joc.2020.01.05

REMAINING FINANCIALLY HEALTHY AND

COMPETITIVE: THE ROLE OF FINANCIAL
PREDICTORS
▪▪ Tomas Kliestik, Katarina Valaskova, George Lazaroiu, Maria Kovacova,
Jaromir Vrbka
Abstract
Financial ratios play an important role in revealing corporate financial soundness, a role which
helps to maintain the competitive position of an enterprise, with the achievement of stable de-
velopment contributing to the elimination of potential financial risks. This paper aims to analyse
and compare financial ratios used in the models of transition countries. The analysis focuses
on the prediction of the future financial development of a particular enterprise as well as the
determination of potential dependencies among the nation in consideration of financial ratios
and country of origin. More than 400 prediction models of the Slovak Republic, the Czech
Republic, Poland, Hungary, Romania, Lithuania, Latvia, Estonia, Croatia, Russia, Ukraine and
Belarus were analysed. The crucial significance of financial ratios in divergent conditions is
revealed using a cluster analysis, categorical data and a correspondence analysis. The cluster
analysis identified similarities among three groups of countries: i) Belarus, Estonia, Croatia and
Latvia; ii) Lithuania, Russia, Hungary and Ukraine, and iii) Czech Republic, Slovakia, Romania
and Poland. The results of the correspondence analysis indicate that the individual groups of
countries prefer different financial ratios in developing models of prediction of financial distress,
differences which arose as a consequence of common changing political, market and economic
conditions within each group of nations. In contrary to results suggested by our findings, the
most frequently used financial ratios in the prediction models throughout the countries remain
current ratio, total-liabilities-to-total-assets ratio, and total-sales-to-total-assets ratio.

Keywords: competitiveness, bankruptcy prediction, financial distress, financial ratio, Eastern European coun-
tries
JEL Classification: O11, M23, L13

Received: December, 2019

1st Revision: February, 2020
Accepted: February, 2020

1. INTRODUCTION
Financial health is one of the best indicators of an enterprise potential for long-term growth
and for a successful operation in the competitive market environment. The enterprises with

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 the financial health-oriented strategy can enjoy a competitive advantage. Financial ratios have
traditionally been indicators of a corporate overall performance (Rahman et al., 2017) and may
help quantify a potential impact of internal ratings on financial performance (Belas et al., 2012).
Measuring and assessing the financial ratios of profitability, activity, liquidity and indebtedness
help create a competitive advantage for an enterprise. However, symptoms of financial distress
never occur at the same time but in certain phases. First, there is a decrease in output volume,
a decrease in profitability, an increased need for working capital, a deterioration of the capital
structure and finally, it comes to persistent insolvency. Financial difficulties can be easily de-
duced from the financial statements, as the unanticipated or unusual development or change in
the ratios may reflect some problematic areas. Moreover, the identification of crucial predictors
can help enterprises assessing their future development (Valaskova et al., 2018). Accounting
based on financial distress indicators is still actively used among researchers and widely used as a
selection criterion (Gavurova et al., 2017; Belas et al., 2018a). The identification of significant fi-
nancial indicators presents the opportunity of modelling the probability of failure and prediction
of financial difficulties even despite the critique the financial indicators are calculated ex post.
However, experience and abundant development of methods predicting the financial situation
of an enterprise in the future indicate that the corporate financial ratios bring the information,
which is necessary. As stated by Virag (2004), ratios may apply to any quantity shown in the
financial statement, although, the choice is restricted only by the fantasy of the analyst or by the
number of items in the financial statement.
The originality of the research lies in exploring the role of financial ratios in the prediction of
financial distress in economic conditions of transition economies, where the financial ratios of
more than 400 models were analysed and assessed, which makes the study pioneering consider-
ing the number of the reviewed models. Thus, the intention of the article is to clarify the role of
the financial ratios in the prediction of financial distress in an analysis considering the multiple
country samples of business entities of transition economies. The research problem includes
the application of several statistical methods used to reveal the dependence among the financial
ratios, method of bankruptcy prediction and country of the model origin, based on the cluster
analysis, categorical data and correspondence analysis. Considering various models of the bank-
ruptcy prediction of transition economies (Kliestik et al., 2019) help judge if the countries with
similar economic development and market transformation use the same indicators when assess-
ing the financial health of business entities. We confirmed that specific groups of countries apply
and prefer different financial ratios when developing the model of the prediction of financial
distress.
The paper is divided into four main parts. The literature review portrays the latest research and
studies being conducted in the field of the bankruptcy prediction. Data and Methods depicts a
brief description of 175 models of Eastern European countries, considering the number of mod-
els being developed in individual countries, methods used and numbers of financial ratios used
in the models. This section portrays the individual steps of empirical analysis. The Results sec-
tion describes all the important findings, resulting in the correspondence map, which is used to
match the countries and most frequently financial ratios following specific economic and politi-
cal conditions of the nations. The Discussion part highlights the crucial results and compares the

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 identification of the most significant financial ratios with other studies devoted to the detection
of important financial ratios in the process of the bankruptcy prediction.

2. THEORETICAL BACKGROUND
There are currently a few hundreds, perhaps up to thousands of prediction models that have
been developed at a specific time and under the conditions of specific economies. By now, many
models of the bankruptcy prediction have been introduced, but this research area remains a field
of a constant research activity (Zelenkov et al., 2017). The basic question that the authors of the
models had to ask is when we can consider the business financially sound and when it is on the
way to any form of financial distress, failure or bankruptcy. Fitzpatrick (1932) was one of the first
to define financial distress. According to his study, financial distress is the corporate inability to
repay its financial obligations after their maturity. Beaver (1966) pointed out that financial dis-
tress can manifest itself in various forms depending on the type of event that occurred – bank-
ruptcy, uncovered bond, bank overdraft or non-payment of a priority share dividend.
The company is in a state of distress when it misses interest payments or does not keep loan
agreements. As claimed by Kljucnikov et al. (2017) and confirmed by Hudakova et al. (2018), the
payment discipline issue and its consequences, including the risk of insolvency and lowered com-
petitiveness, play an important role in the prediction of distress and in the business efficiency
maximization (Dobrovic et al., 2018). Svabova et al. (2018) say that the transformation from a
state of solvency to insolvency occurs only on the due date if the present value of an enterprise’s
assets is lower than the nominal value of the debt. The financial distress very often leads to a
bankruptcy. An enterprise with financial problems has the opportunity to reorganize corporate
debts and to achieve a reasonable level of solvency, or to merge, thereby ceasing to exist as a
newly established enterprise or to file for bankruptcy as a managerial and shareholders answer to
corporate financial problems (Ishtiaq et al., 2018). The notion that financial distress is a separate
economic category was used in the model by Turetsky & McEwen (2001). Corporate financial
problems may be defined as a series of mutually connected levels specified by a particular set
of unfavorable financial operations (Belas et al., 2018b). Each level of financial problems has
an emergency moment and continues until another emergency moment is achieved. In general,
financial problems may be determined as the distance between two emergency moments. Finan-
cial distress starts with an essential decline from positive to negative cash flow. The following
decrease in dividends signals a change to the next stage leading to insolvency. The deterioration
of the financial health of the company on three levels or dimensions defined by Darmawan
& Supriyanto (2018) are economic distress, financial distress and liquidity distress. Fogarassy
et al. (1999) identify financial distress as negative operating income or net pre-tax profit for
min. three successive years. From the outputs of the research analysis of dividend policy in the
time of corporate financial problems, they conclude that when financial distress starts to occur,
the company is typically experiencing difficulties with cash flow and not being able to pay out
dividends. For this reason, a quick and aggressive reduction of dividends along with the follow-
ing negative earnings can be used to determine the level of financial distress. Goldston (1992)
presents a partly quantitative view of financial distress and lists the symptoms of financial dis-
tress as a decline in operating profit of 5% per annum, a year-on-year decline in market share,

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 quality managers departure to competition, declining levels of business capabilities, decrease
of the ability to generate cash, increase in inventory of finished products, reduction of R&D
expenditure, cannibalization of the company’s new products on the market, production capac-
ity is at the level of 60% and the company has a contract volume of production lower than 10%
of an annual planned production. Asquith et al. (1994) tried to explain the corporate financial
distress using the interest coverage ratio. An enterprise is in financial problems if in any of the
two successive years its EBITDA is less than 80% of the company’s interest expense. Using these
methods means that the analysts may estimate the financial distress by a decline in profitability
or insufficient cash flow level, which cannot cover the corporate liabilities. Platt & Platt (2002)
emphasize the deficiency of a uniform definition of the situation when a financial distress oc-
curs in an enterprise and attempts to epitomize various operational determinations of financial
distress in one way. An enterprise is experiencing financial distress if any of the mentioned situ-
ations arises: it has been experiencing few years of negative net operating revenues or a stoppage
of dividend payouts, financial restructuring or massive lay-offs take place.
Developing the prediction model in conditions of the Slovak Republic (Kliestik et al., 2018), the
authors focused on indicators determined by prominent authors as key predictors of financial
health and analyzed studies and researches of Sharifabadi et al. (2017); Tian et al. (2015), Bello-
vary et al. (2007), Ravi & Ravi (2007) and Dimitras et al. (1996). Virag (2004) lists discriminat-
ing financial ratios the most frequently used in bankruptcy models: cash flow to total liabilities,
cash flow to long term liabilities, EAT to total assets, total liabilities to total assets, net working
capital to total assets, liquidity ratio, funds to short term liabilities and net working capital to
sales. Andrés et al. (2012) consider a set of 22 financial ratios to assess the financial situation of
a company. In their selection process, they considered previous research on the determinants of
profitability and bankruptcy. Besides, other authors have included various indicators of liquid-
ity, indebtedness, asset turnover, efficiency and productivity, margin, growth, financing cost
and profitability indicators in their studies. Antonowicz (2014) analyzes the productivity of the
corporate assets applying five chosen ratios, which are the most important financial indicators
used in the financial-economic analysis of enterprises. Those are: (i) general assets productivity
ratio, which is a ratio of revenues from sales to the average annual value of assets; (ii) profit/loss
on sales to the average annual balance sheet total ratio; (iii) return on investment (ROI), which
is a relation of the result on the operating activity to the average annual value of assets; (iv) gross
asset productivity ratio, which is the gross financial results to the company’s total assets involved
in economic processes; (v) return on assets (ROA), which is a net financial result to the average
annual value of the total value of assets. Bahiraie et al. (2011, p. 957) present a complex methodol-
ogy to analyze corporate financial indicators and predict the bankruptcy problems using a list of
40 highly regarded financial ratios. These indices reflect different aspects of firm structure and
performance: liquidity, turnover, operating structure and efficiency, capitalization and profit-
ability. Beaver et al. (2005) and Beaver et al. (2012) explore the effect of differences in financial
reporting and focus on attributes of the predictive ability of financial ratios of bankruptcy. In
addition, important implications for bankruptcy prediction research and practice, especially in
terms of identifying the most important financial predictors, were unveiled in the research of
Lukason & Laitinen (2019).

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 3. RESEARCH OBJECTIVE, METHODOLOGY AND DATA
The recent research in this field indicates that the interest of researchers and academicians in
the bankruptcy prediction modelling has not been abated. In recent years, weakened by the fall
of economic growth, many enterprises fell into a crisis caused by financial difficulties (Le et al.,
2018). Thus, the paper aims to analyze and compare the financial ratios used in the models of the
transition countries focused on the prediction of future financial development of an enterprise
and its competitive position, and to find any dependencies among them considering the financial
ratios and the country of origin.
After an extensive study of journal articles, books and monographs published in the period 1993
to 2018 (after the vast majority of European countries finished their economic transformation),
we identified more than 400 models being developed and applied in Eastern European countries
to predict the financial performance of enterprises in the future; not all of them were used in
the research due to missing, not available and ambiguous data. However, 180 models used to
predict future financial situation of an enterprise, considering the models being formed in transi-
tion economies, mostly in the European ones – the Czech Republic, Slovakia, Poland, Hungary,
Croatia, Latvia, Estonia, Lithuania, Romania, Belarus, Ukraine and Russia were analyzed. The
study reveals that 63 studies were developed in Poland, which is the leader in the formation of
prediction models, more than 20 models were formed in Romania and the Czech Republic, more
than 10 in Slovakia, Ukraine and Russia. Thus, considering the country of origin, 57% of all
prediction models were formed in Eastern Europe, especially in the countries of the Visegrad
group, which may be an indicator of difficult competitive market, legislative obstacles, national
and political backgrounds of the countries. The fact is that the prediction of business failure is
realized using different statistical methods. Except for the standard statistical methods used for
the bankruptcy predictions (discriminant analysis, logistic regression or principal component
analysis), some researchers attempt to use newer significant methods, e.g. Technique for Or-
der Performance by the Similarity to Ideal Solution (Ouenniche et al., 2018) or convolutional
neural networks (Hosaka, 2019; Vochozka, 2017). Garcia et al. (2019) affirm that the corporate
bankruptcy prediction has widely been studied as a binary classification problem using both ad-
vanced statistical and machine learning models. The research on prediction models in transition
economies reveals that authors prefer to use the discriminant analysis (101 studies), mainly the
linear, multiple and quadratic discriminant analyses, and then conditional probability (logit and
probit models) used in 48 studies, neural networks (artificial neural networks, adaptive network-
based fuzzy inference system, self-organizing map and fuzzy logic), decision trees (regression
trees, RE-EM, CHAID), data envelopment analysis, principal component and cluster analyses,
and some others. However, both the national, political, legislative and economic conditions of a
country where the prediction model was developed and the statistical method used are important
measures. The study of different models further reveals that the various number of financial
ratios is used as independent variables entering the model. The results prove that it is optimal to
use three to six ratios entering the prediction model.
The mutual relations among the factors are investigated using several statistical methods. The
use of the cluster analysis focuses on the identification of homogenous subgroups of the dataset
to sort the objects into clusters so that the objects within a common cluster are from as much

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 similar as possible, objects in different clusters are significantly divergent. Thus, the structure
of the data is unveiled. To use the method, the calculations have to meet few preconditions: (i)
there are no outliers and not available of missing data in the dataset; (ii) it is appropriate to have
standardized variables and (iii) the results may be negatively influenced by the existence of de-
pendence among the variables. The choice of the proper measurement method depends on the
analyst and the character of the application solved. However, the most common measures are the
Euclidean distance and Manhattan distance. To cluster the countries in which the models were
developed and the financial ratios used to predict the financial distress, authors use the heuristic-
based agglomerative hierarchical method of clustering, specifically Ward’s method and squared
Euclidean distance, calculated as (Eq. 1):
 (1)

where xik is the value of the k-th variable of the i-th object and xjk is the value of the k-th variable
of the j-th object. The Euclidean distance was used following the basic assumption of the non-
correlated variables entering the cluster analysis. Each node represents a single cluster at the
beginning; eventually, nodes start merging based on their similarities and all nodes belong to the
same cluster (Hexmoor, 2016). The results of the cluster analysis are presented in a dendogram,
which illustrates the arrangement of the clusters produced by the corresponding analyses.
The correspondence analysis is an analogy of the principal components analysis and factor analy-
sis of qualitative data in contingency tables (Clausen, 1998; Stevens, 2002). To examine the in-
ternal structure of the contingency tables only makes sense if there is any statistically significant
dependence between the monitored factors. The use of correspondence analysis is, therefore,
restricted to the hypothesis testing of the independence of selected factors in the contingency
table. The authors tested the hypothesis using the Pearson Chi-square test of independence. If
the testing results as for the rejection of a hypothesis about the independence of the factors be-
ing monitored (we consider the significance level of 1 %), it makes sense to investigate which
categories of factors are similar to each other. The similarity is observed within the category of
one factor, i.e. in the row or columns of the contingency table, or, on the contrary, within the dif-
ferent categories of factors. Considering the practical application of the method, it is desirable to
identify visually the relations between rows and columns of the contingency table. Therefore, it
is necessary to find the projection of the points of the multidimensional space representing rows
and columns of the contingency table into the plane, thus obtaining the correspondence map,
where the Euclidean distance of the plane points approximates the original χ2 -distance of the
points of the multidimensional space. It should be the projection which preserves the relation-
ship between the points of the multidimensional space as much as possible, therefore, the matrix
of standardized residues Z is used, where the factor in the i-th row and j-th column is defined
using the elements of the correspondence matrix and their marginal sums, defined by the equa-
tion (Eq. 2):
 (2)

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 When looking for a suitable projection, it is inevitable to apply the singular decomposition to the
matrix and combine the result with matrices derived from row and column loads to get the axes
of individual row and columns. This way of calculation allows influencing how the points of the
multidimensional space are displayed in a plane (how the correspondence map is formed) – if
the mutual comparison of rows or columns is important or their simultaneous comparison. The
closer the points in the correspondence map, the more similar are the categories and the stronger
their mutual correspondence. It is also important to determine the degree that characterizes the
quality of the transformation of multidimensional points into a correspondence map. The trans-
formation is considered appropriate if it retains the maximum proportion of the variability of
multidimensional points. The variability measure is the total inertia, which is the weighted sum
of the squared χ2 -distance between each row profile and the average row profile, and is defined
as follows (Eq. 3):
 (3)

where I if the total inertia, pi+ is the marginal relative frequency of row i and di is the χ2 -distance
between row i’s profile (Kral et al., 2009) and the average row profile calculated as (Eq. 4):
 (4)

where pij are relative frequencies for row i and p+j is the marginal relative frequency for column
j. Column categories are determined analogically.

4. RESULTS AND DISCUSSION

In order to determine the role of financial ratios in the prediction of financial distress, consid-
ering the country where the prediction model was developed, method and number of variables
entering the model, it was necessary to create a cluster of countries and financial ratios. Using the
cluster analysis enables to find the dependence among the factors under investigation and help
reveal the importance of financial ratios in predictive studies. The use of cluster analysis allows
searching and identifying homogeneous subgroups of the specific selected factors. The resulting
dendogram unveils the following 3 clusters:
yy Cluster 1: Belarus, Estonia, Croatia and Latvia
yy Cluster 2: Lithuania, Russia, Hungary and Ukraine
yy Cluster 3: Czech Republic, Slovakia, Romania and Poland.
It is notable that the created groups of countries correspond with the classification of the Eu-
ropean countries by Bukharin & Preobrazhensky (2007) and Furtak (1986). According to their
classification, cluster 1 presents the countries which belong to former parts of the Soviet Union,
cluster 3 stands for the Soviet-controlled Eastern bloc countries and cluster 2 is a mixture of the
previous two groups of countries. All the countries experienced a dramatic change within the
communist bloc, which influence their political, economic and social life (Sion, 2018; Gandolfi
et al., 2018). After the revolution, the countries started the process of transition to a market

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 economy, presenting growing and developing markets nowadays. Important changes may have
an impact on the operation of enterprises and their financial health and that is why the focus of
the investigation is on these countries.
The research on the essence of financial ratios in the prediction of financial distress focuses on
180 models developed in transition countries. Together, there are 917 financial indicators identi-
fied in the models.

Tab. 1 – Most frequently used ratios in the prediction models. Source: own research
Activity Ratios Freq. Liquidity Ratios Freq.

Total Sales/Total Assets 38 Current ratio 61

Total Revenues/Total Assets 12 Working Capital/Total Assets 30
Cash Flow/Total Assets 10 Quick ratio 26
Cash Flow/Operating Revenues 8 Cash ratio 22
Total Sales/Working Capital 8 Working Capital/Fixed Assets 5
Total Sales/Current Assets 7 Short-term Assets/Total Assets 7
Revenues from Sales/Total Assets 7 Equity/Long-term Assets 7
Inventory/Total Sales 6 (Equity - Share Capital)/Total Assets 5
Inventory/Revenues from 5 163
Sales*365
Total Sales/ Total Liabilities 4
105
Profitability Ratios Freq. Debt Ratios Freq.

ROE 33 Total Liabilities/Total Assets 39

ROA 28 Equity/Total Assets 37
EBIT/Total Assets 19 Cash Flow/ Total Liabilities 14
Operating Profit/Total Assets 19 Equity/ Total Liabilities 12
ROS 14 Total Liabilities/Equity 10
Retained Earnings/Total Assets 11 Total Assets/ Total Liabilities 9
EBT/Total Assets 8 (Current Assets + Accrued Assets)/ 6
(Current Liabilities + Accrued of Li-
abilities + Special Funds + Accrued
Revenue)
EBT/Total Sales 7 Total Debts/Total Assets 6
EBT from Sales/Operating Costs 6 Total Debts/Equity 6
EBIT/Interest Expense 6 Interest Income/(Profit from Eco- 6
nomic Activity + Interest Income)
EAT/Inventory 4 Cash Flow/Total Debts 5
155 150

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 Some of them are used almost in every study, especially the ones from the earliest studies, some
of them are unique. We focus on those financial ratios which appear at least 4 times in all mod-
els (40 most frequently used ratios in transition economies). The intended financial ratios are
depicted in Tabel 1 arranged in the basic groups of financial ratios: ratios of activity, liquidity,
profitability and debt.
The results indicate that the most important one is the group of liquidity ratios which focus on a
firm’s ability to pay its short-term debt obligations. The most important one is the current ratio,
which is a liquidity and efficiency ratio that measures a corporate ability to pay off its short-term
liabilities using its current assets. The current ratio determines the liquidity as short-term liabili-
ties are due in the period of the following year. A higher current ratio is always more favorable
than a lower current ratio because it shows the company can more easily make current debt
payments. The liabilities-to-total-assets ratio is the second most significant which measures the
ratio of corporate assets covered by liabilities. A high liabilities-to-total-assets ratio can be nega-
tive, which indicates the shareholder equity is low and potential solvency issues. Enterprises in
signs of financial distress will often have a high liabilities-to-total-assets ratio. The third one is
the ratio of total sales to total assets, which quantifies the corporate efficiency focusing on the
relation of assets to the revenue generated, therefore, the higher value of the ratio, the better it
is for the company. Finally, the equity-to-asset ratio, which determines the financial health of an
enterprise and is used to assess a company’s financial leverage. If an enterprise wants to prove its
sustainability and a low risk level, a higher level of the equity-to-asset ratio is needed to convince
the creditors.
Despite the fact that some of the variables seem to have no differences, the reverse is true. For
instance, the operating profit over the total assets ratio does not take financial profit into ac-
count. Discussing the differences between earnings before interest and taxes and return of as-
sets, it should be highlighted that return of equity uses the net profit and thus allows assessing
the corporate profitability without the effect of national taxation.
The dendogram of financial ratios captures the results of clustering of 40 most frequently used
financial ratios; it is obvious that four main clusters are identified (Table 2).

Tab. 2 – Clusters of the analyzed financial ratios. Source: own research

Cluster 1 Cluster 4

Inventory/Revenues from Sales365 Equity/Long-term Assets

EAT/Inventory Cash Flow/Total Debt
Working Capital/Fixed Assets Cash ratio
(Equity - Share Capital)/Total Assets Total Assets/ Total Liabilities
Interest Income/(Profit from Economic Inventory/Total Sales
Activity + Interest Income)
EBT from Sales/Operating Costs Total Revenues/Total Assets
Revenues from Sales/Total Assets ROE
Cash Flow/Operating Revenues Equity/Total Assets

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 Total Sales/ Total Liabilities ROA
Total Sales/Working Capital Total Sales/Total Assets
EBT/Total Sales Quick ratio
(Current Assets + Accrued Assets)/(Current ROS
Liabilities + Accrued of Liabilities + Special Current ratio
Funds + Accrued Revenue) Cash Flow/ Total Liabilities
Cash Flow/Total Assets
Cluster 2 Cluster 3

Short-term Assets/Total Assets

Equity/ Total Liabilities
EBIT/Interest Expense EBT/Total Assets
Total Liabilities/Equity Working Capital/Total Assets
Total Debts/Total Assets EBIT/Total Assets
Total Debts/Equity Retained Earnings/Total Assets
Operating Profit/Total Assets Total Liabilities/Total Assets
Total Sales/Current Assets

The results of the cluster analyses focused on the groups of countries and financial ratios, create
the input data of the correspondence analysis. To meet the preconditions of the correspondence
analysis, the hypothesis of the independence of selected factors (financial ratios and countries)
has to be tested using the Pearson Chi-square test of independence (Table 3).
As the p-value of the test is approximately zero, we reject the hypothesis about the independence
of the factors (asymptotic significance is lower than the significance level of 1 %). The depend-
ence between the groups of factors is measured by the Cramer’s V coefficient, which confirms
the statistically significant relation between the financial ratios and a country, where the predic-
tion model was developed.

Tab. 3 – Test of independence of selected factors. Source: own research

Value df Asymptotic Significance
(2-sided)

Pearson Chi-Square 30.301 6 0.000

Likelihood Ratio 31.782 6 0.000
Linear-by-Linear Association 0.332 1 0.564
N of Valid Cases 573

To reveal the mutual relationships among the categories, the authors are interested in the relation
between row and column categories (Table 4a and 4b).

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 Tab. 4a – Overview of row and column points (factors). Source: own research
Overview row pointsa
Score in Di-
Contribution
mension
Factor Cluster

Inertia
Mass Of Point to
Of Dimension to Iner-
Inertia of Di-
1 2 tia of Point
mension
1 2 1 2 TOTAL
Factor1 0.250 -0.191 0.189 0.001 0.069 0.473 0.878 0.122 1.000
Factor2 0.250 0.016 0.056 0.000 0.000 0.041 0.368 0.632 1.000
Factor3 0.250 0.578 -0.065 0.011 0.627 0.055 0.998 0.002 1.000
Factor4 0.250 -0.403 -0.181 0.006 0.304 0.430 0.972 0.028 1.000
Active Total 1.000 0.018 1.000 1.000
a. Symmetrical normalization

Tab. 4b – Overview of row and column points (countries). Source: own research
Overview column pointsa
Score in Dimen-
Contribution
Country Cluster

sion
Inertia

Of Point to
Mass

Of Dimension to Inertia
Inertia of
1 2 of Point
Dimension
1 2 1 2 TOTAL
Country1 0.333 0.388 -0.129 0.007 0.376 0.291 0.985 0.015 1.000
Country2 0.333 -0.489 -0.062 0.011 0.598 0.068 0.998 0.002 1.000
Country3 0.333 0.102 0.191 0.001 0.026 0.641 0.665 0.335 1.000
Active Total 1.000 0.018 1.000 1.000
a. Symmetrical normalization

The most important results can be found in the column TOTAL, which depicts the proportion
of column (row) points on the total inertia. The results prove that in both cases, the two-dimen-
sional correspondence map represents the individual categories appropriately, as the contribu-
tions are equal to one in all cases.
The results show that it makes sense to explore the internal structure of the contingency table
(Table 5) in the correspondence analysis.
Tab. 5 – Contingency table of the correspondence analysis. Source: own research
Factor Cluster Country Cluster
Country1 Country2 Country3 TOTAL
Factor1 0 22 49 71

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 Factor2 4 15 42 61
Factor3 19 17 83 119
Factor4 15 92 215 322
TOTAL 38 146 389 573

The results of the correspondence analysis provide factor scores for both row and column points
of the contingency table. As the problem is symmetrically defined, row and column profiles are
identical. It is not important how far a row point is from the column point. However, the direc-
tions of columns and rows from the origin play a crucial role. These coordinates graphically
portray the relation and combination between the row and column elements in the contingency
table; the result is an individual correspondent map both for row and column profiles. The
overlay of both corresponding maps, i.e. a map of row profiles with a map of column profiles,
portrays the symmetric correspondence map (Figure 1).
The results of the realized cluster and correspondence analyses reveal that the prediction models
developed in former countries of the Soviet Union (Belarus, Estonia, Croatia and Latvia in the
cluster 1) use the financial ratios grouped in cluster 3, which consists of three profitability ratios,
two debt ratios and a liquidity ratio. The non-Soviet Union, but Soviet-controlled Eastern bloc
of countries (Czech Republic, Slovakia, Romania and Poland in the cluster 3) prefer financial
ratios in clusters 1 and 2 in developing the prediction models. The mix of transition countries
grouped in cluster 2 (Lithuania, Russia, Hungary and Ukraine) focuses on financial ratios in
cluster 4, which is formed of nations with the same number of activity, liquidity, profitability and
debt ratios. The research results confirm that a dependence exists between a financial ratio and a
country in which a ratio is preferred in the prediction of corporate financial distress.

Fig. 1 – Symmetric correspondence map. Source: own research

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 Sundry financial ratios have been described in the literature which are used either to predict
bankruptcy or to reveal the financial problems of enterprises. The interest of various authors in
the significant and frequently used indicators to assess the financial distress is high, however, we
will mainly consider two important studies with which to compare the results of our findings –
Bellovary et al. (2007) and Ravi & Ravi (2007).
Bellovary et al. (2007) analyzed 165 predictive models developed before 2004 in which 752 dif-
ferent variables were used in the models, with up to 674 of these variables used in only one or
two models. In the conclusion of the study, 42 variables are presented which were used in more
than five models. However, the most frequently used are the EAT-to-total assets ratio, current-
assets-to-short-term-liabilities ratio, working-capital-to-total-assets ratio and retained-earnings-
to-total-assets ratio, all of which appeared in more than 40 of the models considered. Ravi &
Ravi (2007) followed the previously published studies by Calderon et al. (2002), Dimitras et al.
(1996), O’Leary (1998) and Scott (1981). All together Ravi & Ravi (2007) analyzed 62 prediction
models and ranked the significance of the financial predictors, marking the EAT-to-total-assets
the most important financial indicators followed by the retained-earnings-to-total-assets ratio
and the sales-to-total-assets ratio. Based on the reviews of previously published studies, Kliestik
et al. (2019) selected the financial indicators for the formation of the Slovak prediction model
which appear to be the most relevant and frequently used in Visegrad countries. Comparing
the results of all the mentioned studies of financial predictors, no financial characteristics were
common to all the predictive studies. The ratios found useful in earlier studies (Altman, 1968)
were the first under consideration by many researchers, and these ratios were subsequently used
in later studies. Analyzing the prediction models developed in Eastern European countries, 40
of the most popular and frequently used financial indicators were identified. The question is if
these indicators are consistent with the crucial financial ratios determined in the presented stud-
ies ( Janoskova & Kral, 2019). A mutual comparison of all the ratios indicates that 22 of the 41
financial indicators proposed by Bellovary at el. (2007), 15 out of 20 in the research of Ravi &
Ravi (2007), and 20 out of 37 financial ratios determined in the research of Kliestik et al. (2019)
correspond with the ratios identified in the study of the most preferred financial ratios in the
prediction models developed in the transition economies described in the paper.
The analysis of financial ratios is an important part of the assessment of the future financial de-
velopment of a company. Moreover, this analysis can reveal financial distress and thus enable the
company to be prepared for potential changes in its financial structure. Biernacka & Sedliacikova
(2006), and Cepel et al. (2018) confirm that financial data are the best indication of a company’s
problems, especially considering that falling profits and losses can be seen as a deteriorating level
of competitiveness compared to other industry representatives.

5. CONCLUSION
Different financial problems of business entities may be revealed using bankruptcy prediction
modelling. Moreover, having information about future financial stability, an enterprise can adopt
appropriate financial decisions and thus preserve or even adjust its market competitiveness. The
relevance of the research in this field is underscored by the fact that knowing information about

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 corporate financial health in the ensuing period eliminates potential financial risks. General
corporate prosperity and financial stability is assessed by the crucial financial ratios identified as
well as other characteristics of enterprises along with the economic and national environments
in which they operate.
To clarify the role of the financial ratios in the prediction of financial distress in an analysis
encompassing samples of business entities from multiple countries with transition economies,
the authors applied several statistical methods to reveal the dependence among financial ratio
and country of model origin. In our study, which was based on a cluster analysis, categorical data
and a correspondence analysis, we confirmed that particular groups of countries prefer differ-
ent financial ratios in developing a model of prediction of financial distress. The results of the
cluster and correspondence analyses performed reveal that the prediction models developed in
Belarus, Estonia, Croatia and Latvia use a total-liabilities-to-total-assets ratio, working-capital-
to-total-assets ratio, and EBIT-to-total-assets ratio most frequently. The countries of the former
Soviet-controlled Eastern bloc (Czech Republic, Slovakia, Romania and Poland) prefer mostly
an operating-profit-to-total-assets ratio, total-assets-to-total-liabilities ratio, and total-sales-to-
working-capital ratio (taking into account the frequency of their usage). Lithuania, Russia, Hun-
gary and Ukraine focus most commonly on the use of a current ratio, total-sales-to-total-assets
ratio, equity-to-total assets ratio, and return of equity.
Despite our extensive review, calculations and analyses, some limitations can be identified in
the research. We attempted to detect the role of financial ratios in the prediction of financial
distress in selected transition economies using the vast majority of Eastern European countries.
Thus, it would be beneficial to also unveil the importance and significance of financial ratios in
other European or even American countries and to compare the results with ours. It would be
also useful to determine the impact of the statistical method on the use of financial ratios in the
prediction models. We would undertake this in future research, as well as the application of other
statistical methods – principal component analysis and factor analysis – to validate the results of
the presented research. The results of this research may be used by other enterprises or investors
in evaluating and analysing the financial health of an enterprise in the specific conditions of the
selected Eastern European countries. Moreover, an indication of positive development in the
future is a sign that a strong competitive position is being built, an outcome which may be used
as an effective assessment criteria for market analysts. Finally, making clear, educated choices
regarding which specific indicators to use within a specific country may be very helpful for acad-
emicians in developing models in particular economic conditions.
Acknowledgements
This research was financially supported by the Slovak Research and Development Agency–Grant No. APVV-
14-0841: Comprehensive Prediction Model of the Financial Health of Slovak Companies and is an output of the
scientific project VEGA 1/0428/17 Creation of new paradigms of financial management at the threshold of the
21st century in the conditions of the Slovak Republic.

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Contact information

prof. Ing. Tomas Kliestik, PhD.

University of Žilina
Faculty of Operation and Economics of Transport and Communications
Department of Economics
Slovakia
E-mail: [email protected]
ORCID: 0000-0002-3815-5409

Ing. Katarina Valaskova, Ph.D.

University of Žilina
Faculty of Operation and Economics of Transport and Communications
Department of Economics
Slovakia
E-mail: [email protected]
ORCID: 0000-0003-4223-7519

assoc. prof. George Lazaroiu

Spiru Haret University
Faculty of Social and Human Sciences, Department of Social Human Sciences
Romania
E-mail: [email protected]

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 Ing. Maria Kovacova, Ph.D.
University of Žilina
Faculty of Operation and Economics of Transport and Communications
Department of Economics
Slovakia
E-mail: [email protected]
ORCID: 0000-0003-2081-6835

Ing. Jaromir Vrbka, MBA, PhD.

Institute of Technolog y and Business in České Budějovice
Czech Republic
E-mail: [email protected]

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