The financial condition of the construction companies before bankruptcy

Abstract

The paper aims to discover the symptoms of the forthcoming bankruptcy in the Czech construction industry. The construction industry in the Czech Republic has been in deep crisis. The analysis compares the financial performance of 81 construction companies which went bankrupt between 1/2011 and 5/2013 with the similar sample of 81 construction companies having relatively good credit risk rating. The basic year for the comparison is 2010. The Propensity Score Matching method (PSM) statistically identifies two similar samples by total assets and NACE code. The comparison uses Mann-Whitney test of differences between two independent samples. The results point out that an inappropriate enterprise financial management is one of the main sources of business failure in the construction industry. Limited liability companies are less resistant to bankruptcy than other legal persons. The companies before bankruptcy do not manage their debts carefully in relation to their profitability. They do not create enough own funds to overcome a crisis. The analysis reveals statistically significant differences in key financial indicators between two samples.

Keywords: Bankruptcy, construction industry, financial analysis, insolvency