Stanford Business School Research: Financial Statements Are Still Valuable Tools for Predicting Bankruptcy.

Byline: Stanford Graduate School of Business

STANFORD, Calif., May 12 (AScribe Newswire) -- Despite growing public skepticism over how useful financial statements are in providing information to investors, researchers at Stanford's Graduate School of Business have found that the value of financial ratios for predicting bankruptcy has not declined significantly over time.

Professors Maureen McNichols and William Beaver and 2005 doctoral student Jung-Wu Rhie have reexamined the usefulness for predicting bankruptcy of financial ratios such as return on assets (net income divided by total assets), cash flow to total liabilities (earnings before interest, depreciation, and taxes divided by both short- and long-term debt), and leverage (total liabilities to total assets). Their study, published in Review of Accounting Studies in March 2005, explored how three forces have influenced this predictive value over the past 40 years.

The first …