By Stewart Jones
This study uses a cash flow based model to predict corporate bankruptcies in Australia. Using four cash based variables, the model produces very good out-of-sample predictive accuracy (AUC of around .85) which is better than some of the more complex multivariate models in the literature. The model also outperforms a logit model estimated on Altman Z score variables. The paper illustrates how to calculate and interpret the logit model failure probabilities on the failed Australian company Dick Smith’s recent financial statements.