Improvement of Prosperity Prediction in Czech Manufacturing Industries

Abstract

There are many ways to determine financial health of a company. Classic tools of financial analysis emphasize data in financial statements. When trying to reach an overall classification of a company, e.g. from the point of view of an investor, indicators of profitability, liquidity, leverage and activity might generate contradictory clues regarding financial health of the company. Such analysis does not only generate ambiguous results, but is also lengthy. Therefore, the IN05 financial model was created for particular specifics of the Czech Republic economic environment to predict prosperity of companies. It measures the prosperity on the base of economic value added (EVA). More than ten years have passed since the launch of the IN05 index. The aim of this study is to quantify contemporary prediction strength of the IN05 index on a sample of almost 500 companies. Moreover, an effort was made to enhance the accuracy of the model for particular branches of manufacturing industries. It was found that contemporary explanatory power of the index IN05 is 48.58 % when applying the original evaluation scale, and 70.79 % when assessing 68.62 % of the sample except the gray zone. The accuracy of the model was enhanced by the author in all categories, i.e. a higher accuracy (correct prediction probability) without considering the gray zone and higher accuracy (conditioned correct prediction probability) using the gray zones in all branches of manufacturing industries. Robustness of these results was verified on another sample of 195 companies.