The Role of Cash Flow Ratios in Improving the Accuracy of Models Based on Accrual Ratios to Predict the Financial Failure of Jordanian Industrial Companies Shareholders

Mohammad Matar, Ahmad Obaidat

Abstract


The purpose of this study is to identify the role of cash flow ratios in improving the accuracy ability of the traditional models which are used to predict the financial failure of Jordanian industrial companies as a going concern.
To achieve the aim of the study, a Discriminant Analysis was used to design a mathematical model based on 30 accrual ratios which were mostly used in related previous studies, on a sample of (36) companies, half of them faced bankruptcy and the other half continued, for the period which extended from 1989 to 2001. Then the same analysis, sample, and period were used to design another model based on (23) cash flow ratios in addition to the previous accrual ratios. After that, each model was tested on a sample of (37) companies, three of which faced bankruptcy and the others continued, for the period which extended from 2002 to 2005.
The findings of the study revealed that the cash flow ratios improve the prediction ability of the models of accrual ratios in regard to the evaluation of Jordanian industrial companies as a going concern. Those findings agree with the findings revealed by Matar (2001), Ali (2003), Sharma and Iseline (2003), and Jahmani and Dawood (2004), being evident in the prediction ability of the model which increased from (80.8%) to (91.8%).

Keywords


Going concern, Financial Failure, Financial Failure Prediction Models, Accrual Ratios, and Cash Flow Ratios

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