Identifying High Growth SMEs Through Balance Sheet Ratios

Abstract

In this paper we trying to discover the balance sheet ratios that enable us to predict which firms are better candidates for a high-growth path. Following the intuition behind the credit scoring model (i.e., Z-score model), we consider the idea that the balance sheet in the period preceding the high growth affects the balance sheet at the time of the exceptional growth. To this end, we used a quantile regression and a TOBIT analysis that discriminates, according to a defined threshold, among the financial data of two groups of firms (High growth and Non-High Growth firms) selected from a population of approximately 21,000 firms. The results of the analysis demonstrate the relevance of firm size, firm age, and, most importantly, internal cash flows (despite bank loans), to the growth and success of a firm.

Keywords: firm growth, financial ratios, quantile regression, z-score mode

JEL Classification: D21, L20, O39