The Usefulness of Financial Ratios as Predictors of Household Insolvency: Two Perspectives

Written By: Sharon A. DeVaney

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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