Predicting company bankruptcy is a critical skill for investors, creditors, and business owners alike, especially as economic conditions shift in 2025. One of the most reliable ways to forecast a company’s financial distress is through financial ratio trend analysis. This method involves tracking key financial ratios over time to spot warning signs of trouble before they culminate in bankruptcy. If you want to sharpen your ability to foresee which companies might fail, understanding how to use these ratios effectively is essential.

Financial ratios are like the vital signs of a company’s financial health—by analyzing their trends rather than single snapshots, you gain a clearer picture of where the company is heading. Instead of just looking at a low current ratio or a high debt-to-equity ratio once, observing how these figures evolve over months or years reveals whether a company is steadily deteriorating or stabilizing.

Let’s break down how to use financial ratio trend analysis to predict bankruptcy in 2025, with practical steps and examples so you can apply this knowledge confidently.

Start by focusing on a handful of key financial ratios that have proven predictive power in bankruptcy forecasting. These include:

• Liquidity ratios such as the current ratio and quick ratio, which measure a company’s ability to cover short-term obligations.
• Leverage ratios like debt-to-equity and interest coverage ratio, indicating the level of debt risk and ability to service that debt.
• Profitability ratios such as return on assets (ROA) and operating margin, reflecting ongoing earning capacity.
• Efficiency ratios like inventory turnover and receivables turnover, showing how well the company manages its assets.

For example, imagine a retail company whose current ratio has dropped steadily from 1.8 in early 2023 to 0.9 by mid-2025. That downward trend signals growing liquidity problems, increasing the risk it won’t meet immediate liabilities. If simultaneously, its debt-to-equity ratio climbs from 1.2 to 3.0, this indicates rising leverage that could strain cash flows due to interest payments. Such combined trends are red flags pointing toward financial distress.

To make this approach actionable:

1. Collect financial statements quarterly or annually to build a timeline of ratios rather than relying on a single period.
2. Plot these ratios on a graph to visualize trends clearly. Look for consistent declines in liquidity or profitability, or sharp spikes in leverage.
3. Compare the trends against industry benchmarks to differentiate between sector-wide challenges and company-specific issues.
4. Incorporate macroeconomic context. For example, 2025 has seen rising credit spreads and heightened default risks for speculative-grade companies, signaling tougher financing conditions overall[2]. A company showing worsening financial ratios in this environment faces amplified bankruptcy risk.
5. Use trend patterns alongside predictive models if available. Research shows that combining financial ratios with macroeconomic indicators improves bankruptcy forecasts significantly[5].

One practical tip is not to wait for a ratio to hit a dangerous level but to act on the trajectory. For instance, a company’s interest coverage ratio declining steadily from 5x to 1.5x over two years signals it’s approaching trouble, even if it hasn’t yet defaulted on payments. Early intervention or caution can save investors or lenders from losses.

To put this into perspective with recent data, bankruptcy filings—particularly Chapter 7 consumer filings—have increased by over 11% year-over-year as of mid-2025[1]. Although Chapter 11 business filings have decreased slightly, the overall environment remains challenging. Tracking financial ratios can help anticipate which companies might soon be added to those bankruptcy rolls.

Another real-world insight is the importance of understanding the interplay between ratios. For example, a company may maintain a decent current ratio but show a rapid drop in operating margin, indicating profitability issues that could impair long-term liquidity. Or a firm might improve liquidity temporarily by selling assets but increase debt simultaneously, masking underlying problems.

As you analyze companies, remember the following practical advice:

• Always look for consistency in trends rather than one-off anomalies.
• Beware of window dressing—companies may manipulate short-term ratios through accounting moves.
• Pay attention to industry cycles since some sectors naturally have different financial norms.
• Use qualitative information alongside ratios, like management changes or market conditions, to contextualize your findings.

To summarize the steps for using financial ratio trend analysis in predicting bankruptcy in 2025:

• Identify and calculate key ratios regularly.
• Monitor their trends visually and quantitatively.
• Compare trends to industry averages and macroeconomic signals.
• Look for combinations of worsening liquidity, rising leverage, and falling profitability.
• Use early warning signs to inform investment, lending, or management decisions.

By following this approach, you’ll gain a clearer, more actionable understanding of company health in a complex economic environment. Financial ratio trend analysis isn’t just about crunching numbers—it’s about reading the story those numbers tell over time, helping you predict and possibly prevent financial failure before it happens. Whether you’re an investor, creditor, or business leader, mastering this skill will give you a significant edge in 2025 and beyond.