Research on Company Financial Risk Early Warnings Based on FA-LSTFormer Model

Timely identification of company financial risks is crucial for investors and regulators. However, existing studies overlook the class imbalance caused by the scarcity of high-risk samples, and the interpretability of deep models is insufficient, making it difficult to meet the practical needs. To address these problems, we propose a classification model named FA-LSTFormer, which models a company’s financial risk as low-, medium- and high-warning tasks. FA-LSTFormer employs LSTM and Transformer to decouple the short-term continuity and long-term dependency inherent in financial data. To further attend to indicator-level nuances, we incorporate a Risk-Sensitive Hierarchical Indicator Attention (RSHA) module. Moreover, given the pronounced class imbalance where high-risk events are substantially underrepresented, we further propose a Class-Imbalance-Aware Focal Loss (CIFL) function to prioritize these minor yet critical samples and suppress false negatives. On the dataset of Chinese A-share manufacturing listed companies, experimental results show that our FA-LSTFormer achieves superior performance in accuracy, precision, recall, F1-score and AUC, achieving 92.76%, 93.13%, 91.84%, 92.48%, and 95.27%, respectively. Compared to the suboptimal LTR-Net, it improves these metrics by 1.64–3.60%. Compared to the LSTM–Transformer baseline, FA-LSTFormer improves on it by 4.30–9.13%. In the risk-oriented decision evaluation, FA-LSTFormer achieves a warning ROC of 0.954 for the high-risk class and lowers the error rate to 9.82%. It maintains an accuracy rate of 84.46% even after three years of early warning and exhibits strong robustness across different warning thresholds and company sizes. These results verify the advantages of FA-LSTFormer in both algorithmic performance and practical early-warning applications.

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Publication Details

Journal
Algorithms
Published
2026-07-23
DOI
https://doi.org/10.3390/a19080610
Primary Topic
Financial Distress and Bankruptcy Prediction
Type
article
Field-Weighted Citation Impact
0.00
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article

Research on Company Financial Risk Early Warnings Based on FA-LSTFormer Model

Ning Wu, Miao Cheng
Algorithms
Financial Distress and Bankruptcy Prediction
article

Research on Company Financial Risk Early Warnings Based on FA-LSTFormer Model

Ning Wu, Miao Cheng
article en

Abstract

Timely identification of company financial risks is crucial for investors and regulators. However, existing studies overlook the class imbalance caused by the scarcity of high-risk samples, and the interpretability of deep models is insufficient, making it difficult to meet the practical needs. To address these problems, we propose a classification model named FA-LSTFormer, which models a company’s financial risk as low-, medium- and high-warning tasks. FA-LSTFormer employs LSTM and Transformer to decouple the short-term continuity and long-term dependency inherent in financial data. To further attend to indicator-level nuances, we incorporate a Risk-Sensitive Hierarchical Indicator Attention (RSHA) module. Moreover, given the pronounced class imbalance where high-risk events are substantially underrepresented, we further propose a Class-Imbalance-Aware Focal Loss (CIFL) function to prioritize these minor yet critical samples and suppress false negatives. On the dataset of Chinese A-share manufacturing listed companies, experimental results show that our FA-LSTFormer achieves superior performance in accuracy, precision, recall, F1-score and AUC, achieving 92.76%, 93.13%, 91.84%, 92.48%, and 95.27%, respectively. Compared to the suboptimal LTR-Net, it improves these metrics by 1.64–3.60%. Compared to the LSTM–Transformer baseline, FA-LSTFormer improves on it by 4.30–9.13%. In the risk-oriented decision evaluation, FA-LSTFormer achieves a warning ROC of 0.954 for the high-risk class and lowers the error rate to 9.82%. It maintains an accuracy rate of 84.46% even after three years of early warning and exhibits strong robustness across different warning thresholds and company sizes. These results verify the advantages of FA-LSTFormer in both algorithmic performance and practical early-warning applications.

AlgorithmsVol. 19(8)
Anhui Sanlian University (CN)
Openalex Percentile: Top 3%
Financial Distress and Bankruptcy Prediction
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