Are Profitability and Leverage Able to Predict the Risk of Financial Distress?
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Dec 28, 2024
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Abstract
The performance of the organization from a financial perspective plays a crucial role in attracting investment. Whenever this profitability indicator is put in the context of making an investment, the signaling theory arises where information about the firm’s activities is provided to affect an investment decision. The goal of this study is to observe profitability and leverage affect financial distress. The population is manufacturing enterprises registered on the Indonesia Stock Exchange between 2018 and 2022. Testing uses the SPSS statistical test tool with logistic regression. Profitability can predict the risk of financial distress. The risk of financial distress can be reduced by increasing profitability. Meanwhile, Leverage does not yet provide a definite reflection for predicting the risk of financial distress. Optimizing profits is the main thing in reducing the risk of financial distress. This will also have an impact on business continuity and not experiencing bankruptcy. The novelty of this study is that the indicator of financial distress is estimated by six consecutive years of negative earnings per share.
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References
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Prasetya Margono, F., & Gantino, R. (2021). Influence of Firm Size, Leverage, Profitability, and Dividend Policy on Firm Value of Companies in Indonesia Stock Exchange. Copernican Journal of Finance & Accounting, 10(2), 45–61. https://doi.org/10.12775/CJFA.2021.007
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Safitri, M. G., & Yuliana, I. (2021). The Effect of Profitability and Leverage on Financial Distress with Inflation as Moderating. Jurnal ASET (Akuntansi Riset), 13(1), 134–143. https://doi.org/10.17509/jaset.v13i1.31368
Sumani, S. (2020). Prediksi Financial Distress: Rasio Keuangan dan Sensitivitas Makroekonomi Perusahaan Sektor Primer. EKUITAS (Jurnal Ekonomi Dan Keuangan), 3(3), 285–305. https://doi.org/10.24034/j25485024.y2019.v3.i2.4153
Susan, M., Winarto, J., & Gunawan, I. (2022). The Determinants of Corporate Profitability in Indonesia Manufacturing Industry. Review of Integrative Business and Economics Research, 11(1), 184–190. https://sibresearch.org/uploads/3/4/0/9/34097180/riber_11-1_06_k20-067_184-190.pdf
Whited, T. M., & Wu, G. (2006). Financial Constraints Risk. Review of Financial Studies, 19(2), 531–559. https://doi.org/10.1093/rfs/hhj012
Amaroh, S. (2023). Measuring Financial Distress of Islamic Banks Under Pandemic and Its Determinants: Random Effect Approach. IQTISHODUNA: Jurnal Ekonomi Islam, 12(1), 73–88. https://doi.org/10.54471/iqtishoduna.v12i1.2092
Amponsah-Kwatiah, K., & Asiamah, M. (2021). Working Capital Management and Profitability of Listed Manufacturing Firms in Ghana. International Journal of Productivity and Performance Management, 70(7), 1751–1771. https://doi.org/10.1108/IJPPM-02-2020-0043
Asutay, M., & Othman, J. (2020). Alternative Measures for Predicting Financial Distress in the Case of Malaysian Islamic Banks: Assessing the Impact of Global Financial Crisis. Journal of Islamic Accounting and Business Research, 11(9), 1827–1845. https://doi.org/10.1108/JIABR-12-2019-0223
Bukhori, I., Kusumawati, R., & Meilani, M. (2022). Prediction of Financial Distress in Manufacturing Companies: Evidence from Indonesia. Journal of Accounting and Investment, 23(3), 588–605. https://doi.org/10.18196/jai.v23i3.15217
Dang, H. N., Vu, V. T. T., Ngo, X. T., & Hoang, H. T. V. (2019). Study the Impact of Growth, Firm Size, Capital Structure, and Profitability on Enterprise Value: Evidence of Enterprises in Vietnam. Journal of Corporate Accounting & Finance, 30(1), 144–160. https://doi.org/10.1002/jcaf.22371
Dirman, A. (2020). Financial Distress: The Impacts of Profitability, Liquidity, Leverage, Firm Size, and Free Cash Flow. International Journal of Business, Economics and Law, 22(1), 17–25. https://ijbel.com/wp-content/uploads/2020/08/IJBEL22_205.pdf
Dwiantari, R. A., Gede, L., & Artini, S. (2021). The Effect of Liquidity, Leverage, and Profitability on Financial Distress (Case Study of Property and Real Estate Companies on the IDX 2017-2019). American Journal of Humanities and Social Sciences Research, 5(1), 367–373. www.ajhssr.com
Erwan, E., Martusa, R., & Meythi, M. (2023). Apakah Profitabilitas, Leverage, dan Ukuran Perusahaan Menurunkan Kesulitan Keuangan Perusahaan? Jurnal Akuntansi Multiparadigma, 14(2), 412–421. https://doi.org/http://dx.doi.org/10.21776/ub.jamal.2023.14.2.29
Finishtya, F. C. (2019). The Role of Cash Flow of Operational, Profitability, and Financial Leverage in Predicting Financial Distress on Manufacturing Company in Indonesia. Jurnal Aplikasi Manajemen, 17(1), 110–117. https://doi.org/10.21776/ub.jam.2019.017.01.12
Giarto, R. V. D., & Fachrurrozie, F. (2020). The Effect of Leverage, Sales Growth, Cash Flow on Financial Distress with Corporate Governance as a Moderating Variable. Accounting Analysis Journal, 9(1), 15–21. https://doi.org/10.15294/aaj.v9i1.31022
Gunawan, A. W., Assagaf, A., Sayidah, N., & Mulyaningtyas, A. (2020). Financial Distress di BUMN Indonesia dan Faktor-Faktor yang Memengaruhi Investasi, Leverage dan Cash Flow Operation terhadap Financial Distress pada Perusahaan BUMN. EKUITAS (Jurnal Ekonomi Dan Keuangan), 3(2), 226–243. https://doi.org/10.24034/j25485024.y2019.v3.i2.4135
Hidayat, M. A., & Meiranto, W. (2014). Prediksi Financial Distress Perusahaan Manufaktur di Indonesia. Diponegoro Journal of Accounting, 3(3), 1–11. http://ejournal-s1.undip.ac.id/index.php/accounting
Mariani, D., & Suryani. (2018). Pengaruh Kinerja Keuangan terhadap Nilai Perusahaan dengan Kinerja Sosial dan Kinerja Lingkungan sebagai Variabel Moderator. Jurnal Akuntansi Dan Keuangan, 7(1), 59–78. https://journal.budiluhur.ac.id/index.php/akeu/article/view/585
Masdupi, E., Tasman, A., & Davista, A. (2018). The Influence of Liquidity, Leverage and Profitability on Financial Distress of Listed Manufacturing Companies in Indonesia. Advances in Economics, Business and Management Research, 57, 223–228. https://doi.org/https://doi.org/10.2991/piceeba-18.2018.51
Maulida, I. S., Moehaditoyo, S. H., & Nugroho, M. (2018). Analisis Rasio Keuangan Untuk Memprediksi Financial Distress Pada Perusahaan Manufaktur Yang Terdaftar Di Bursa Efek Indonesia 2014-2016. Jurnal Ilmiah Administrasi Bisnis Dan Inovasi, 2(1), 180–194. https://doi.org/10.25139/jai.v2i1.1149
Novia, T. S., & Meythi, M. (2022). Profitability: The Impact of Corporate Social Responsibility and Corporate Governance Implementation. International Journal of Innovative Technologies in Economy, 38(2), 1–13. https://doi.org/https://doi.org/10.31435/rsglobal_ijite/30062022/7845
Poston, K. M., Harmon, K., & Gramlich, J. D. (2011). A Test of Financial Ratios as Predictors of Turnaround Versus Failure Among Financially Distressed Firms. Journal of Applied Business Research (JABR), 10(1), 41–56. https://doi.org/10.19030/jabr.v10i1.5962
Prasetya Margono, F., & Gantino, R. (2021). Influence of Firm Size, Leverage, Profitability, and Dividend Policy on Firm Value of Companies in Indonesia Stock Exchange. Copernican Journal of Finance & Accounting, 10(2), 45–61. https://doi.org/10.12775/CJFA.2021.007
Purbawangsa, I. B. A., Solimun, S., Fernandes, A. A. R., & Mangesti Rahayu, S. (2020). Corporate Governance, Corporate Profitability Toward Corporate Social Responsibility Disclosure and Corporate Value (Comparative Study in Indonesia, China and India stock Exchange in 2013-2016). Social Responsibility Journal, 16(7), 983–999. https://doi.org/10.1108/SRJ-08-2017-0160
Safitri, M. G., & Yuliana, I. (2021). The Effect of Profitability and Leverage on Financial Distress with Inflation as Moderating. Jurnal ASET (Akuntansi Riset), 13(1), 134–143. https://doi.org/10.17509/jaset.v13i1.31368
Sumani, S. (2020). Prediksi Financial Distress: Rasio Keuangan dan Sensitivitas Makroekonomi Perusahaan Sektor Primer. EKUITAS (Jurnal Ekonomi Dan Keuangan), 3(3), 285–305. https://doi.org/10.24034/j25485024.y2019.v3.i2.4153
Susan, M., Winarto, J., & Gunawan, I. (2022). The Determinants of Corporate Profitability in Indonesia Manufacturing Industry. Review of Integrative Business and Economics Research, 11(1), 184–190. https://sibresearch.org/uploads/3/4/0/9/34097180/riber_11-1_06_k20-067_184-190.pdf
Whited, T. M., & Wu, G. (2006). Financial Constraints Risk. Review of Financial Studies, 19(2), 531–559. https://doi.org/10.1093/rfs/hhj012