IDENTIFICATION OF FINANCIAL SIGNS OF BANKRUPTCY: A CASE OF INDUSTRIAL ENTERPRISES IN THE CZECH REPUBLIC

The current approach to creating bankruptcy models involves a search for predictors that have been shown to predict bankruptcy in only one period, namely a year before it occurs. That approach does not allow to identify the root causes of bankruptcy. Yet studies exist ( Beaver, 1966; Deakin, 1972; Henerby, 1996; Niemann, Schmidt, Neukirchen, 2008) which suggest that the signs of bankruptcy could be recognized much sooner. The intent of this article is to present the results of a research aspiring to identify the warning signs of bankruptcy within one to five years before it occurs. It was found that a predominant sign of an eventual bankruptcy is a decrease in the performance of company's assets. In the period of three years before the bankruptcy, this development is further aggravated by a decline in the quality of generated earnings. The causes and the first signs of a decrease in the performance of company's assets appear more than five years before the company actually experiences bankruptcy.