Analysis of Financial Ratios to Predict Financial Distress Conditions of Manufacturing Companies Listed on the Indonesian Stock Exchange

Abstract

Purpose: This aimsof this study is to identify and analyze the effects of liquidity, profitability, and leverage ratio changes to predict financial distress experienced by manufacturing companies listed on the Indonesian stock exchange. Theoretical framework: The quality of financial reports can improve and enhance a company’s financial performance and confirm the agency theory. The use of financial report quality can help explain relationship conflicts between the principal and the agents and strengthen the explanation of agency theory. Design/Methodology/Approach: The methodology this study used secondary data from the Indonesian stock exchange website. The research population consisted of all manufacturing companies listed on the Indonesian stock exchange. The sample of this study was chosen based on purposive sampling techniques resulting in 15 manufacturing companies meeting the criteria for analysis using logistic regression. The data were analyzed in a quantitative manner using SPSS version 23. Findings: The result of this research confirm the notion of agency theory stating that current ratio (CR) and return on assets (ROA) have negative and significant effects on financial distress. However, the debt-to-asset ratio (DAR) variable does not significantly affect financial distress. These findings indicate that a good current ratio and return on assets of a company will affect the company’s financial conditions while the effect of the debt-to-asset ratio (DAR) is not significant because the company is experiencing financial pressure in settling long-term debts. Research, Practical & Social implications: The study contributes to strengthening previous research findings and helps provide useful information to investors, manufacturing companies, and the business world in general on the Indonesian Stock Exchange in predicting the financial conditions of companies that are experiencing financial distress. Originality/Value: The value of the study contributes ideas to improve the quality of financial information, especially for accounting professional institutions (standard setters) and regulators to improve the quality of financial accounting standards in order to provide quality information to investors, government, stakeholders, and business society in general.