Financial Analysis to Predict Financial Distress of Small and Medium-Sized Entities in Malang City

Abstract

The goal of this study is to examine financial ratios to predict financial distress in small and medium-sized enterprises (SMEs) in the city of Malang. The financial ratios used as vector predictors are Liquidity Ratio proxied by Current Ratio (CR), Leverage Ratio proxied by Debt to Asset Ratio (DAR) and Profitability Ratio proxied by Return on Asset (ROA). Based on the results of multiple regression analysis with a significance level of 5%, the results of the study concluded that the model is fit and can be used to predict financial distress of SMEs in Malang city. Result of the study shows that: (1) profitability has a negative and significant effect in predicting financial distress of SMEs in Malang city with a wald test value is positive amounted to 7.167 and 0.007 significance value <0.05, (2) liquidity has no effect in predicting financial distress with a wald test value is positive amounted to 2.374 and 0.123 significance value >0.05, (3) leverage has a positive and significant effect in predicting financial distress of SMEs in Malang city with a wald test value is positive amounted to 17.995 and 0.000 significance value <0.05. On the basis of the above findings, it is suggested that: (1) for small and medium-sized companies, it may be used as a consideration for taking corrective action before it evolves into serious financial distress and leads to bankruptcy; (2) for academics and researchers, knowledge of the effect of profitability, liquidity and leverage in predicting financial distress, which may increase empirical and scientific evidence, may be used as a basis for predicting financial distress, (3) For the investor, it can be used as a consideration in making the right investment decisions.

Financial Distress Risk Levels of Listed Small and Medium Enterprises in the Philippines

“…The high ratio of leverage provides the impression to investors that the firms could not efficiently manage their debts, thus increasing the firm's occurrence of financial distress. Similar finding was noted by Susilowati et al (2021) wherein that leverage had a significant influence in predicting financial distress.…”

“…By nature, financial distress is a condition where a company faces financial difficulties (Kisman et al, 2019) and experiences a lack of cash flow to meet debt obligations (Amoa-Gyarteng, 2021) and a decline in profitability (Susilowati et al (2021) and suffers financial pressure such as poor performance, loss in the income statement for some period (Handoko et al, 2020). According to Mulyaningsih et al (2021), this refers to a situation that is confronted by companies when they suffer financial pressure, such as poor performance, loss in the income statement for some period and they had to struggle to pay their debt.…”

“…Financial distress determinants can be shown from cash flow analysis, business policy analysis and company financial reporting. (Susilowati et al, 2021). As emphasized by Mulyaningsih et al (2021), the causes of financial distress include, among others, failed business strategies, mismanagement of assets and wrong prediction of business opportunities.…”

“…If SMEs experience persistent financial problems and are unable to alter their business practices, they will undoubtedly encounter challenges in responding to intense level of market competition. This can lead to losses and ultimately to financial distress (Susilowati et al, 2021).…”

Uncovering financial distress conditions and its determinant factors on insurance companies in Ethiopia

“…Furthermore, a study conducted by [ 43 ] the study suggested financial ratios (liquidity ratio, leverage ratio, and profitability ratio). Profitability has a negative and significant effect; liquidity has no effect.…”