Importance of Cash Flows Ratios to Predict Financial Failure of Libyan Public Industrial Firms

This study aims at identifying the importance of cash flows ratios to predict financial failure of Libyan public industrial firms . The Multiple Discriminant Analysis is used to identify the best set of cash flow ratios that can discriminate between the failed and non-failed firms . Eleven cash flow ratios were calculated for a sample consisted of ( 16 ) non failed firms and ( 7 ) failed firms, and used in the developed model. The ( 23 ) firms were pair-matched on the basis of industry and asset size for the period between the years ( 1998 – 2006 ) . The findings show that 3 out of 11 cash flow ratios are significant to predict the failure of Libyan public industrial firms : Cash Coverage Ratio , Net Cash Flow from Operating Activities to Capital Expenditures , and Net Cash Flow from Operating Activities to Revenues. The proposed model enables the re-rating of companies in the sample analysis within the two groups of failed and non-failed companies in the second year before the failure with the accuracy of 73.9%.