Classification trees as a tool to predict financial difficulties in Latin American companies through their accounting ratios

Analysis of accounting information of companies is relevant to the detection of situations of financial vulnerability. While this information is usually available for companies listed on various stock markets, generally not have an explicit characterization referred to its financial position (i.e. in crisis or healthy). In this context, the aim of this paper is to analyze the impact of same financial ratios on the financial situation of companies from different Latin American markets: Chile, Peru and Argentina, based on the financial statements in the period 2000 - 2011. In order to detect which financial ratios have primordial influence in companies in crisis, recursive methods were applied in this paper: Classification Trees. In this way, it is encouraged to have tools to predict the financial condition of the companies. In all markets, profitability was decisive with a strong impact on the classification of companies. Subsequently, in order to analyze the impact of other ratios, this variable was excluded, being more disparate the impact of other variables among countries. In the case of Argentina, the size of the company, working capital and asset turnover were the most important predictors; in the case of Chile was the operating cash flow; and that of Peru, liquidity followed by asset turnover.