Acta Montanistica Slovaca Ročník 11 (2006), číslo 4, 283-286 Applying discriminate analysis to predict prospects of corporate activities Jaroslav Dvořáček 1 a Radmila Sousedíková Abstract The paper reports on results of discriminate analysis applications, as regards predictions of prospects of a company’s future economic developments – its success or default. Prediction accuracy impacts are qualified concerning the type and number of the distinguishing characteristics (discriminants), as well as the size of the files analysed. Key words: economic forecasting,bankruptcy, prediction accuracy. Introduction Analysing default economies of the Ostrava-Karvina collieries in the final year of their existence provided for the evidence that the same changes affected their capital structures. The obvious implication of the fact was a view that deficient capital circulation structures imply the default (Dvořáček, 2006). Envisaging a firm’s economic prospects, it was subsequently proposed to employ a set of specific financial ratios to predict the insolvency by applying methods of discriminate analysis (Dvořáček, Sousedíková, 2006). At the same time it was highlighted that it was necessary to take into account several factors influencing the accuracy of the prediction concerning the economic success or failure. This especially concerned the size of the files analysed, and type as well as number of the financial ratios (discriminators) used for the discriminate analysis. Applying the discriminate analysis Based on the knowledge of input data, the so-called discriminators, an objective of the practical applications of discriminate analysis is to identify a principal, standard by which it might be judged whether a firm develops its economies successfully in the future period of 1-2 years or a danger of default is looming. The methods of discriminate analysis were applied both to files of default and sound companies at which point the size of these files was continually increasing. At the same time the discriminators in the ratio or index form or the combined ratio/index form were variously applied. The financial balance data, as to the 31-12 date, provided for the ratios which date was preceded by maximum of 12 months before the default announcement or 12 months before evaluating economies of the sound businesses. The equation, ) , was used for calculating the indexes, at which point 31-12 balance data in time, ( )( 2 / 1 − − = t t i ( ) 1 − t , preceded the default by 12 month maximum, and 31-12 balance data in time ( ) 2 − t , preceded the default by 24 month maximum. The sound business indexes were established analogically. The only difference was that the default dates were substituted by the dates of evaluation. The application structure of the discriminate analysis was as follows: a) Ratio/index combinations: o 31 sound firms, 31 defaults firms, o 62 sound firms, 62 defaults firms. b) Ratios: o 39 sound firms, 39 defaults firms, o 62 sound firms, 62 defaults firms. c) Indexes: o 32 sound firms, 32 defaults firms o 62 sound firms, 62 defaults firms Concerning industrial sectors and their shares in the files analysed, processing industries and service providers dominated being accompanied by mining industries. 1 prof. Ing. Jaroslav Dvořáček, CSc., RNDr. Radmila Sousedíková, Ph.D., Institut ekonomiky a systémů řízení, Hornicko-geologická fakulta, VŠB-Technická univerzita Ostrava, 17. listopadu 15, 708 33 Ostrava, Česká republika (Recenzovaná a revidovaná verzia dodaná 18. 12. 2006) 283