Going Concern, Earnings Capacity and Corporate Financial Stability

TLDR: In this paper, the efficacy of fiscal health indicators of firms with their perceived going-concern with a view to introducing more robust measurement techniques was compared with the use of short and long-term solvency tools to gauge the financial health of prospective firms.

Abstract: Contemporary investors worry more about firms’ survival prospect than immediate financial gains. Analysts employ the use of short and long-term solvency tools to gauge the financial health of prospective firms. Often, these tools fail to generate the required information owing to their inherent defects. Specifically, going concern valuations and firms’ financial stability are corporate finance issues which have not been adequately addressed as present practice tends to align more to macroeconomic than individualized industrial analysis. This study aimed to compare the efficacy of fiscal health indicators of firms with their perceived going-concern with a view to introducing more robust measurement techniques. The study employed ex-post facto research design using 91 companies listed on the Nigerian Stock Exchange and the National Stock Exchange of India. Data analysis method includes multivariate regression analysis, one-way ANOVA and Pearson correlation coefficient. Results indicate the newly introduced going concern ratio has significant relationships with firms’ earning capacity, corporate financial stability ratio, Altman’s Z-score and Enyi’s relative solvency ratio (RSR). However, the current ratio (CR) has no significant relationship with the going concern ratio, implying that the current ratio is no longer effective in determining corporate solvency status in the face of changing financing paradigm.