DeVaney, 1994

DeVaney, S. (1994) The usefulness of financial ratios
as predictors of household insolvency: Two perspectives. Financial Counseling
and Planning,
5, 15-24.

The Usefulness of Financial Ratios
as Predictors of Household Insolvency:

A. DeVaney (1)

The purpose of this study was to examine the usefulness of financial
ratios as predictors of household insolvency. Financial ratios were developed
for 1,934 households using data from the Survey of Consumer Finances. Two
statistical methods—logistic regression and a classification tree procedure
(CART)—were used for analysis. The 1983 Liquidity ratio was the most
important predictor of 1986 insolvency according to the logistic regression
while the 1983 Assets/Liabilities ratio was the most important variable
in the classification tree. The Gross Annual Debt Payments to Disposable
Income ratio was second in importance for each of the two methods. Implications
for financial educators, counselors, and planners are offered.

Key Words: insolvency, financial ratios, classification tree

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1. Sharon A. DeVaney, Assistant
Professor, Consumer Sciences and Retailing, Purdue University, 1262 Mathews
Hall, West Lafayette, IN 47907-1262. Phone: (317) 494-8300 Fax: (317) 494-0869.