Predicting corporate failure: some empirical evidence from the UK

Purpose – The purpose of this paper is to use relevant financial information of private medium‐sized failed and non‐failed manufacturing firms in the UK, during the period 1994‐2004 to determine whether corporate failure can be predicted by developing a Z ‐score model. Design/methodology/approach – Multiple discriminant analysis is used to develop the Z ‐score to support the notion that Z ‐score is an innovation to overcome the numerous difficulties associated with using single ratios to measure companies' health or risk of failure. Findings – This paper advances the notion that the net profit margin is superior to the gross profit margin in discriminating between failed and non‐failed UK manufacturing companies in terms of its significant contribution to the Z ‐score, though the latter exceeds the former slightly using the univariate analysis. Originality/value – This research contributes to the area of benchmarking by providing a method to more accurately predict corporate failure.