How well do Partial Least Squares and Financial Ratio Analysis Predict Corporate Failure in Malaysia

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Author	Noraini Abdullah, Nurul Fatihah Rosli
ISSN	2307-2466
On Pages	326-331
Volume No.	3
Issue No.	7
Issue Date	December 01, 2020
Publishing Date	December 01, 2020
Keywords	Financial ratios, corporate failures, failure predictions, partial least square analysis, structural equation model.

Abstract

Sustainable companies and their life span had been a recurring issue in the current millennium for developing countries. The aim of this study is to develop a failure prediction model by using partial least square (PLS) analysis with different financial ratios, and to examine which of the financial ratios can be best used to predict corporate failure in both failed and non-failed firms. A sample of 22 distressed and non-distressed companies in the same industry sector firms with 10 financial ratios for the period from 2009 until 2012 were obtained from Bursa Malaysia Listed Companies. From the ten dominant financial ratios, only profitability, liquidity, leverage and efficiency ratios had remained after modelling. This study also found that the failure prediction model using PLS showed with high predictive accuracy rates of about 90%. Amongst the financial ratios, leverage and efficiency ratios were the most significant predictor of corporate failure.

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