Objective - The purpose of this study is to construct a business failure classification model that may be reliably applied to companies in the manufacturing sector. The model will be used to improve the predictive abilities for companies with different financial, business and operating conditions in the Malaysian context.

Methodology/Technique - A total of 32 companies were analysed with 16 financial ratios using multiple discriminant analysis. A moderate discriminant function was constructed and five ratios were found to be significant in discriminating power. The classification results show high predictive accuracy rates of between 68% and 70% for correct classification.

Findings - The results of this study produce a group centroid of -0.16 for distressed companies and 0.16 for non-distressed companies. The group centroid was determined using the mean of Z-score of both distressed and non-distressed firm. The frequency in the histogram also shows that most of the Z-scores fall into the group centroid area.

Novelty - There has been scarce research conducted on this particular topic in Malaysia. Having the knowledge and skills in ratio analysis and bankruptcy prediction models can be very useful if one can take corrective and preventive measures to prevent failure in their own companies.

Type of Paper: Empirical

Keywords: Corporate Distress; Financial Ratio; Manufacturing Sector; Malaysia

JEL Classification: G33, M41.