Financial distress analysis of 'Special Treatment' companies in China

Abstract

This paper aims to find out the financial ratios of the 'Special Treatment' (or financially distressed) companies in China that are significantly weaker than those of the regular companies and, consecutively, expose areas of poor financial performance that lead these companies to financial distress. The financial data of 'Special Treatment' companies during the period from 2002 to 2009 have been compared with that of financially non-distressed companies from the same period by applying discriminant analysis. The study finds that as many as five financial ratios, namely cash flow coverage ratio, net income to assets, cash ratio, quick ratio, current ratio and debt ratio, are significantly weaker in financially distressed companies.