Predicting corporate sickness: the case of indian textile industry

Abstract

Corporate Sickness is widespread in the Indian Corporate Sector. Several financial institutions are trying hard to develop early warning systems. This dissertation is a small contribution in that direction. The attention is focused on the Textile Industry because the phenomenon is rampant here. The work addresses itself to three main problems. They are: 1. Conceptual difficulties in defining corporate sickness. 2. Possibility of applying Discriminant Analysis Procedures towards the development of an early warning system. 3. Institutional and legal factors behind this phenomenon. Several definitions of corporate sickness are in vogue and each is prompted by a different purpose, Since early warning is closely linked with that constitutes corporate sickness a clear understanding of the definitional complications is necessary, Since the major concern in our country is on employment and also on the funds allocation of the financial institutions we have adopted a definition of sickness which incorporates these concerns. For the purposes of developing an early warning system 54 sick firms and 54 non-sick firms in the Textile industry were used as sample. From an initial set of 16 financial ratios, several subsets were tried and it is found that a four variable subset discriminates better between sick and non-sick firms with 90 percent accuracy. Following are the four ratios: 1. Raw Materials Consumed to Sales 2. Inventory to Current Assets 3. Retained Earnings to Total Assets 4. EBIT + Depreciation to Total Liabilities. Suitable holdout procedure was used to validate the findings. In a mixed economy like ours, with a host of Government regulations operating, corporate sickness takes a different colour – namely takeover by the Government. The thesis takes a close look at this aspect also. This has certain important policy implications.