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A financial ratio is a quotient of two numbers, where both numbers consist of financial statement items. A third term,
predictive ability, also requires explanation but cannot be defined briefly. The emphasis upon financial ratios does not
imply that ratios are the only predictors of failure. The primary concern is not with predictors of failure per se but rather with
financial ratios as predictors of important events-one of which is failure of the firm. Further, the primary concern is not with the
ratios as a form of presenting financial-statement data but rather with the underlying predictive ability of the financial statements
themselves. The ultimate motivation is to provide an empirical verification of the usefulness i.e., the predictive ability of
accounting data i.e., financial statements William H. Beaver : 1966
The next task was to identify those firms in Moodys that had failed during the time period being studied 1954 to 1964,
inclusive. In the front of Moodys there appears a list of firms- firms on whom Moodys has formerly reported but no longer
does so. There are many reasons why a firm; may be dropped- name change, merger, liquidation, lack of public interest, and,
most importantly, failure. The list of several thousand names was condensed into a list of firms that had failed.
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Supplementing this basic list was a list of bankrupt firms provided by Dun and Brad- street. The final list of failed firms
contained 79 firms on which financial- statement data could be obtained for the first year before failure William H. Beaver :
1966
f. Offering Price
Once we control for IPO fundamentals such as, income, sales, book equity, growth opportunities, insider retention, and
investment banker prestige and allow for different valuation of these fundamentals across different time-periods,average
valuations of IPOs in the recent boom and crash periods were not statistically different from those of the late 1980s. A naïve
interpretation of this result would be that valuations of the IPOs in the late nineties were not excessive compared to the late
eighties. We would caution against such an interpretation, since we find that fundamentals, especially income and sales, were
valued quite differently in the late nineties.
7. Previous Research
Liquidities ratio attempts to measure a company’s ability to pay off
its short term liabilities the better as it is a clear signal that a company can pay its debt that are coming due in the near future and fund still in its
ongoing operation. On the other hand, a company with a low coverage rate
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should rise a red flag for investor as it may be a sign that a company will have difficulty meeting in running its operations, as well as meeting its
obligations. investopedia 2010;2
Lubika Lesakova 2007;3 management wants to increase its ROE, and we have presented three important levers of financial performance:
profit margin, asset turn over, and financial leverage. We concluded that whether company is a big one or small one, careful management of these
levers is a challenging managerial task, involving an understanding of the nature of the company’s business and the interdependencies among the
levers. Lubika Lesakova 2007;3 thought ratio analysis can provide useful
information concerning a company’s operations and financial condition, it has some limitations. Potential problem are listed below:
a. Many large firms operate a number of different activities in quite different industries, and in such cases it is difficult to develop a
meaningful set of industry averages for comparative purposes. This tend to make ratio analysis more useful for small, narrowly-focused
firms than for large, multidivisional firms. b. Most firms want to be better than average although half will be above
and half below the median, so to attain average performance is not
