A “User Friendly” Bankruptcy Prediction Model Using Neural Networks

Abstract

Belgium has faced an important number of corporate bankruptcies during the last decade. The aim of this paper is to develop a model that predicts bankruptcy using three financial ratios that are simple and easily available, even for small businesses. We used a sample of 3,728 Belgian Small and Medium Enterprises (SME's) including 1,864 businesses having been declared bankrupt between 2002 and 2012 and conducted a neural network analysis. Our results indicate that the neural network methodology based on three financial ratios that are simple and easily available as explanatory variables shows a good classification rate of more or less 80 percent. Results of this study may be of interest for financial institutions and for academics.