Estimating SME’s risk of bankruptcy using stochastic methods: Romanian Development Regions

Nowadays, Romania has a functional market economy. Retrospective financial analysis is used to increase the profitability and value of an economic entity searching for sources of capital and an efficient allocation. This analysis requires certain financial methods and techniques to assess firm’s financial performance at a given moment. Economic theory has always been interested in developing methods to predict the risk of bankruptcy. One of the methods commonly used in current financial analysis is to determine the areas where the risk of bankruptcy is higher using the Score function. This paper presents the theory of the Score function method for financial analysis of an economic entity and then applies it for SMEs in Romanian development regions. The bankruptcy risk for some SMEs is approximated and the strengths and weaknesses of financial management in order to design new strategies are identified. Changes induced by the current economic and financial crisis may involve, when the probability is a priori, an exchange of the bankruptcy rate. The techniques presented and applied in this paper, allowed us, for each considered region, to obtain a general picture of the economic and financial situation of SMEs and allowed for a global diagnosis and a synthesis of their economic and financial situation.