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ISSN 2809-8501 (Online)
UTSAHA (Journal of Entrepreneurship)
https://journal.jfpublisher.com/index.php/joe
Vol. 2, Issue. 3, July 2023
doi.org/10.56943/joe.v2i3.355
The Effect of Profitability, Liquidity, Leverage, Sales Growth on
Financial Distress in Consumer and Non-Consumer Cyclicals
Companies listed on the IDX during the 2019-2021
Gracelia Friska1*, Drs. Eko Pudjolaksono2
1graceliafris@gmail.com, 2ekopudjo.58@gmail.com
Universitas Surabaya
*Corresponding Author: Gracelia Friska
Email: graceliafris@gmail.com
ABSTRACT
The ability of a company to compete is determined by the company’s performance. If there
is a lack of effectiveness in the company’s performance, then company leaders can take the
right action to ensure that things become more efficient. Moreover, performance
measurement is closely related to the company’s financial condition. Every company
should create and use financial reports in the process of managing the company’s finances.
Therefore, this research is needed to find out the effect of profitability, liquidity, leverage,
sales growth on financial distress in consumer and non-consumer cyclicals companies
listed on the IDX during the 2019-2021. The sampling method used in this research is
nonprobability sampling by applying purposive sampling technique. The sample used in
this research consists of trading companies listed on the Indonesia Stock Exchange (IDX)
during the 2019-2021 that are engaged in buying and selling activities without production.
The results of this research indicate that (1) the profitability ratio measured using Return
on Asset has a positive effect on financial distress; (2) the profitability ratio measured using
Return on Equity has a negative effect on financial distress; (3) the liquidity ratio measured
using the Current Ratio has no effect on financial distress; (4) the leverage ratio measured
using the Debt Equity Ratio has an effect on financial distress; and (5) the sales growth
ratio has no effect on financial distress in trading sector companies listed on the IDX
during 2019-2021.
Keywords: Altman Z-Score, Financial Distress, Financial Ratio
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INTRODUCTION
The ability of a company to compete is determined by the company’s
performance. If there is a lack of effectiveness in the company’s performance, then
company leaders can take the right action to ensure that things become more
efficient. Moreover, performance measurement is closely related to the company’s
financial condition. Every company should create and use financial reports in the
process of managing the company’s finances. A financial report is a report that
describes the financial position of the accounting process results during a certain
period which is used as a communication tool for interested parties (Suteja, 2018).
Financial ratio analysis serves as a determinant of company performance used by
company management. Meanwhile, financial ratio analysis for investors serves to
determine the investment place based on the financial condition of the company
that will be used as an investment place (Tyas, 2020).
Financial reports are considered to have good benefits for the company,
therefore research will be conducted on the benefits of these financial reports, using
one form of research using financial ratios that aim to predict company performance
such as bankruptcy and financial distress. Financial distress occurs before
bankruptcy or liquidation, therefore companies must be able to predict financial
distress in order to anticipate bankruptcy (Rahmayanti & Hadromi, 2017). There
are four financial ratios tested in the research conducted by Damajanti, et al (2021),
including leverage, liquidity, profitability and sales growth. Meanwhile, the results
of this research are that there are three out of four factors that are proven to affect
financial distress. While the factor that does not affect financial distress in this
research is activity.
Other research that uses financial ratios as a factor that affects financial
distress concluded that from four financial ratios used as test variables, only one
ratio has an effect on financial distress (Amanda & Tasman, 2019). The result of
the research indicated that liquidity, sales growth, and company size have a negative
effect on financial distress, while only leverage has a positive effect on financial
distress. Moreover, another research conducted by Hadi (2023) found that
profitability and pandemic have an effect on financial distress, while liquidity and
leverage have no effect on financial distress conditions.
Based on those previous researches, they examines the factors that affects to
financial distress as the protection from bankruptcy of the company itself. Since the
previous researchers not studies the financial distress in cunsomer and non
cunsomer, this research aims to find out the effect of profitability, liquidity,
leverage, sales growth on financial distress in consumer and non-consumer
cyclicals companies listed on the IDX during the 2019-2021.
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LITERATURE REVIEW
Agency Theory
According to Supriyono (2021), agency theory is a contractual relationship
between principals and agents. This relationship is conducted for a service in which
the authorizer authorizes the agent regarding the best decision making for the
principal by prioritizing the interests in optimizing company profits so as to
minimize expenses including tax expenses by doing tax avoidance. In addition, if
the company has a profit from company management, this will provide a positive
signal to investors to support the current management position and provide higher
compensation to management. The agency theory is used in this research in order
to examine the relationship between management and company owners by
observing the level of timeliness of financial report information that will be
submitted by management to company owners, that is, by observing the date of
financial report submission.
Signalling Theory
Brigham and Houston (2014) stated that signalling theory is a shareholder’s
perspective on the company’s opportunity to increase company value in the future,
which information is provided by company management to shareholders. This
action is taken by the company in order to signal to shareholders or investors
regarding the company’s management in assessing the company’s future prospects
so that it can distinguish between good and bad quality companies. Published
company reports can be used as a guideline for shareholders and a consideration in
investing. Company management can provide company reports as an internal
interest. Investor interest can be maintained by providing information about the
company to shareholders. Signalling theory emphasises the importance of company
reports that are used as investment decisions (Moeljadi & Supriyati, 2014).
Financial Distress
Financial distress is a company’s financial condition that has decreased before
the company suffers bankruptcy. This condition is indicated by the company’s
inability to fulfil its maturing obligations, especially when the company does not
have enough operating cash flow to cover its current obligations such as accounts
payable or interest payments. If the company is unable to overcome this problem,
then the company has the potential to experience bankruptcy. According to
Gamayuni in Hantono’s research (2019), there are five types of financial distress
such following below:
1. Economic failure is a company’s revenue situation that cannot cover the
company’s total costs, such as capital costs.
2. Business failure is a company condition that can stop operational
activities in order to reduce losses for creditors.
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3. Technical insolvency is a company condition that is unable to fulfill its
maturing obligations.
4. Insolvency in bankruptcy is a situation where the book value of total
liabilities exceeds the market value of the company’s assets.
5. Legal bancrupty is a condition that leads a company to be legally
bankrupt.
Financial Ratio
Horne and Wachowicz (2017) state that financial ratios are used to evaluate
a company’s financial condition and performance. In addition, financial ratios are
also useful for evaluating the performance of a company that has been achieved in
a certain period of time which can appear in the company’s financial report.
Basically, the company’s past, current, and future financial performance are
evaluated using financial ratio calculations (Lithfiyah et al., 2019). There are
several financial ratio variables that affect company’s financial distress such
following below (Damajanti et al., 2021):
1. Profitability
Profitability is a metric used to assess how successfully the
management of the business runs its activities. It indicates how well the
business can produce profits over a specific time period in relation to
sales, total assets, or ownership capital. The level of profitability
describes the company's performance as seen from the company's
ability to generate the profits (Loppies et al., 2022).
2. Liquidity
A corporation’s liquidity can serve as a proof of its capacity to fulfill
its short-term obligations through smooth operations, therefore the better
a company is able to fulfilling those obligations by smooth operations
and using smooth assets, then more accurate its liquidity becomes
(Amanda & Tasman, 2019). Through comparing the company’s smooth
operations to its smooth debts, Hanafi and Halim (2014) argue that the
liquidity ratio is used to evaluate a company’s short-term liquidity
capacity. The fact that it needs to implement all other considerations
makes this liquidity standard relative rather than absolute (Hery, 2016).
3. Leverage
One way to evaluate a company’s ability to use loans as a source of
funding for its various operational activities is through the usage of
leverage (Damajanti et al., 2021). According to Fahmiwati et al (2017),
income obtained through leverage comes from particular sources of
funds that may suffer a constant cost in the form of interest costs, such as
debt bonds, bank credits, and so on.
4. Sales Growth
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According to Kasmir (2015), sales growth is an overview of the
company’s ability to maintain its economic position amid economic
growth and its business sector. If the company’s sales growth rate is high,
this indicates the company’s success in implementing its product
marketing and sales strategies. However, if the sales growth rate is low,
it can be assumed that the company is facing financial distress conditions.
The Modified Altman Z-Score Model
Z-Score Altman is an indicator of the potential bankruptcy of a company
discovered by Edward I. Altman in 1968. Altman modified the model to reduce the
effect of industrial factors by including the variable turnover of assets (X5). The
existence of this modified model, the Z-Score Altman model can be applied to all
types of companies, both manufacturing and non-manufacturing.
Hypothesis
The Effect of Profitability on Financial Distress
According to research conducted by Damajanti, et al (2021), researchers
investigated the impact of profitability levels on financial distress. The aim is to
determine the effect of profitability on financial distress. The findings found that
profitability can have a significant effect on financial distress. Erayanti (2019)
examines the effect of profitability on the prediction of financial distress. It aims to
determine the effect of profitability, especially ROE (Return on Equity) on the
financial distress of a company.
H1 : Profitability has a negative effect on financial distress
The Effect of Liquidity on Financial Distress
The research conducted by Damajanti, et al (2021) examined the effect of
liquidity on financial distress. The findings found that this liquidity ratio has a
significant effect on financial distress. In this research, the liquidity ratio is
measured using the Current Ratio which is used to determine the amount of current
assets owned by the company to fulfil short-term debt.
H2 : Liquidity has a negative effect on financial distress
The Effect of Leverage on Financial Distress
However, Damajanti, et al (2021) investigated the effect of leverage on
financial distress and discovered that leverage has a significant effect on financial
distress.
H3 : Leverage has a positive effect on financial distress
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The Effect of Sales Growth on Financial Distress
Sales growth is a reflection of a company in maintaining its economic position
amid economic growth. The research conducted by Damajanti, et al (2021)
examined the effect of sales growth on financial distress as a result, that is, sales
growth has a significant effect on financial distress.
H4: Sales growth has a negative effect on financial distress.
RESEARCH METHODOLOGY
The sampling method used in this research is nonprobability sampling by
applying purposive sampling technique. Purposive sampling is a non-random
sample selection method, that is widely used in qualitative research for the
identification and selection of information-rich cases related to the phenomenon of
interest (Palinkas et al., 2015). This technique is used for quantitative research or
generalisation studies (Sugiyono, 2017). The sample used in this research consists
of trading companies listed on the Indonesia Stock Exchange (IDX) during the
2019-2021 that are engaged in buying and selling activities without production. In
this research, researchers use independent variables, such as the value of financial
ratios which consist of profitability, liquidity, leverage, and sales growth, while the
dependent variable in this research is financial distress.
Statistical Analysis Technique
Descriptive Statistical Test
Descriptive statistics are used to describe quantitative data derived from the
financial statement data of trading companies that are the object of research. The
purpose of descriptive statistical analysis is to provide an overview of the
distribution and characteristics of the research sample data (Ghozali, 2016).
Classical Assumption Test
Normality Test
The normality test is used to determine whether in the regression model there
are residual variables that have a distribution with normal values by conducting a
statistical analysis of one sample Kolmogorov Smirnov test with the following
criteria:
1. One sample of Kolmogorov Smirnov test > 0.05 = Normal
2. One sample of Kolmogorov Smirnov test < 0.05 = Not normal
This normality test can also be used by observation. If the significance value
is greater than α = 0.05 or 5%, the hypothesis is accepted which indicates that the
data is normally distributed, while if the significance value is smaller than alpha,
the hypothesis indicates that the data is not normally distributed.
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Multicollinearity Test
Multicollinearity test is used to determine the Variance Inflation Factor (VIF)
value and tolerance value. If the VIF value < 10 and the tolerance value> 0.1 means
that there is no multicollinearity between the independent variables.
Heteroscedasticity Test
Gujarati (2013) defined that homoscedasticity is a condition when the residual
value at each prediction value varies and the variation tends to be constant. One
way to test for heteroscedasticity is using the Park test. The test is conducted in
order to get the correlation value of unstandardised residuals with all independent
variables. If the correlation value indicates a significance level greater than 0.05,
then there is no heteroscedasticity problem in the regression model. On the other
hand, when the significance value is smaller than 0.05, then there is a
heteroscedasticity problem in the regression model.
Autocorrelation Test
The autocorrelation test is used to determine the correlation between time
series and cross section data. Autocorrelation always occurs with time series data.
The existence or non-existence of autocorrelation can be identified using the
Durbin-Watson (DW) test.
Multiple Linear Regression Analysis
The regression method aims to determine the relationship between one
variable to another variable. The affected variable is called dependent variable,
while the affecting variable is called the independent variable. Regression that has
one dependent variable and more than one independent variable is called multiple
regression (Muhtar & Aswan, 2017). The equation is as follows:
Y = α + β1X + β2X2 + β3X3 + β4X4 + β5X5
RESULT AND DISCUSSION
Research Result
Descriptive Statistical Test
Trading companies that are listed on the Indonesia Stock Exchange and only
focus on buying and selling activities without producing an item during the 2019-
2021, and have conducted an IPO before 2019, do annual financial reports using
the rupiah exchange currency regularly during the research period. The results of
data collection obtained 70 trading companies that focus on buying and selling
activities without having to produce a raw product into one of the ready-to-use
goods with a recovery that has fulfilled the criteria desired by the researcher, with
three years observations. Therefore, the total samples needed are 193 data.
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Classical Assumption Test
This classic assumption test is conducted using four tests consisting of
normality test, heteroscedasticity test, multicollinearity test, and autocorrelation test
by using the assistance of SPSS version 25 for Windows programme.
Normality Test
In the 1-Sample K-S test, the significance value is the basis for decision
making with the criteria that the significance value (Asym. Sig) is more than 0.05,
the decision is normal distributed data. It can be seen that the total sample size of
193, that is, with all company data during 2019 to 2021, indicates the Sig. value of
0.00. In accordance with the criteria for normality test, then this value can be
interpreted that the data used is not normally distributed.
Heteroscedasticity Test
The heteroscedasticity test aims to determine whether there is an inequality
of variance from the residuals of an observation to other observations of the
independent variables in a regression model (Ghozali, 2018: 137). The criteria for
homoscedasticity in this test is that the residual significant value of the independent
variable has a value greater than 0.05 (5%). On the other hand, when the significant
residual independent variable has a value smaller than 0.05, it is concluded that
there are symptoms of heteroscedasticity.
Table 1. The Result of Heteroscedasticity Test
Coefficientsa
Unstandardized Coefficients
Standardized Coefficients
Model
B
Std.
Error
Beta
t
Sig.
(Constant)
0,321
0,161
1,991
0,048
ROA
-0,035
0,047
-0,056
-0,758
0,450
ROE
0,047
0,088
0,045
0,530
0,597
CR
0,000
0,002
-0,005
-0,067
0,947
DER
0,066
0,041
0,140
1,588
0,114
SG
-0,002
0,002
-0,060
-0,819
0,414
a. Dependent Variable: ABS_RES_4
Source: Processed Data using SPSS 25 (2022)
In this research, researchers used the Park test using the Natural Logarithm
formula to avoid heteroscedasticity problems because all variables had significant
values above 0.05. Therefore, it can be concluded that in this test, the regression
model does not have heteroscedasticity problems.
Multicollinearity Test
The basis for decision making in indicating the lack of multicollinearity is
when the VIF value of the independent variable is less than 10 (< 10) and the
tolerance value of independent variables is more than 0.10 (> 0.10).
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Table 2. The Result of Multicollinearity Test
Coefficientsa
Collinearity Statistics
Model
Tolerance
VIF
(Constant)
ROA
0,973
1,027
ROE
0,734
1,363
CR
0,889
1,125
DER
0,669
1,496
SG
0,986
1,014
a. Dependent Variable: FINANCIAL DISTRESS
Source: Processed Data using SPSS 25 (2022)
Table 2 indicates that the tolerance value of each independent variable in the
research, such as ROA, ROE, CR, DER, and SG, has a value greater than 0.10
(10%) and the VIF value has a value smaller than 10. Thus, it can be concluded that
the independent variables in this research do not have multicollinearity symptoms.
Autocorrelation Test
In this research, researchers used the Durbin-Watson test to detect the
existence of autocorrelation problems. The criteria for decision making for the
Durbin-Watson test so that it can be considered passed or there is no autocorrelation
problem is if dU < DW < 4 - dU. The following are the results of the autocorrelation
test using the Durbin-Watson test on the table 3.
Table 3. The Result of Durbin-Watson Test
Model Summaryb
Model
R
R Square
Adjusted R
Square
Std. Error of
the Estimate
Durbin-
Watson
1
0,527a
0,278
0,258
0,70826
1,899
a. Predictors: (Constant), SG, DER, ROA, CR, ROE
b. Dependent Variable: FINANCIAL DISTRESS
Source: Processed Data using SPSS 25 (2022)
Based on the table above, it can be seen that the resulting Durbin-Watson
(DW) value is 1.899. It indicates that there is no correlation between confounding
errors during the 2019-2021, and it can be concluded that the regression model is
free from autocorrelation problems or the hypothesis is accepted.
Hypothesis Test
Hypothesis testing in this research was conducted by conducting four tests,
such as multiple linear regression analysis test, simultaneous test (F-test), partial
test (T-test), and coefficient of determination test. The test results are as follows:
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Table 4. The Result of Multiple Linear Regression
Coefficientsa
Unstandardized Coefficients
Standardized Coefficients
Model
B
Std. Error
Beta
t
Sig.
(Constant)
2,054
0,209
9,834
0,000
ROA
0,234
0,061
0,243
3,863
0,000
ROE
0,281
0,115
0,224
3,682
0,012
CR
0,001
0,003
0,029
0,435
0,664
DER
-0,350
0,053
-0,497
-6,544
0,000
SG
0,000
0,003
0,006
0,094
0,925
a. Dependent Variable: FINANCIALDISTRESS
Source: Processed Data using SPSS 25 (2022)
According to the regression equation results, it can be interpreted that the
constant value is 2.054. The value of the profitability variable by calculating using
ROA and ROE, the significant value of Return on Assets (ROA) indicates a
significant value level of 0.000 which means that the significant value is less than
0.05 with a regression coefficient value of 0.290, it can be concluded that the
profitability variable has a positive effect on financial distress. The significant value
of Return on Equity (ROE) indicates a significant level of 0.000 which means that
the significant value is less than 0.05 with a regression coefficient value of 0.061,
it can be concluded that ROE has a positive effect on financial distress. Meanwhile,
the significant value of the Curent Ratio (CR) is 0.664 which indicates a significant
value of more than 0.05 with a regression coefficient value of 0.001, it can be
concluded that the curent ratio has no effect on financial distress. The value of Debt
Equity Ratio (DER) has a significant value of 0.000 where the significant value is
less than 0.05 which also has a regression coefficient value of -0.350 which means
that the debt equity ratio has a negative effect on financial distress. Furthermore,
sales growth which has a significant value of 0.925, the significant value of sales
growth indicates that the significant value is greater than 0.05 with a regression
coefficient value of 0.000, it can be concluded that sales growth has no effect on
financial distress.
Table 5. The Result of Simultaneous Test
ANOVAa
Model
Sum of
Squares
Df
Mean
Square
F
Sig.
Regression
36,068
5
7,214
14,380
0,000b
Residual
93,804
187
0,502
Total
129,872
192
a. Dependent Variable: FINANCIALDISTRESS
b. Predictors: (Constant), SG, DER, ROA, CR, ROE
Source: Processed Data using SPSS 25 (2022)
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Simultaneous regression test is conducted in order to determine the effect of
independent variables together or simultaneously affect the dependent variable.
Based on table 5, the F-test on the regression model indicates a significance value
of 0.000. Based on the significance value, it can be seen that the probability value
of the regression model is smaller than 0.05. Along with the simultaneous test
criteria, it can be concluded that the regression model is feasible to be used to
predict financial distress, and the variables ROA, ROE, CR, DER, and SG
simultaneously affect financial distress.
Table 6. Partial T-Test Results
Coefficientsa
Unstandardized Coefficients
Standardized Coefficients
Model
B
Std. Error
Beta
t
Sig.
(Constant)
2,054
0,209
9,834
0,000
ROA
0,234
0,061
0,243
3,863
0,000
ROE
0,281
0,115
0,224
3,682
0,012
CR
0,001
0,003
0,029
0,435
0,664
DER
-0,350
0,053
-0,497
-6,544
0,000
SG
0,000
0,003
0,006
0,094
0,925
a. Dependent Variable: FINANCIALDISTRESS
Source: Processed Data using SPSS 25 (2022)
The results of this partial test can be seen by examining the significant value
< 0.05, if the significant value is in accordance with these provisions, then the
independent variable can individually affect the dependent variable, but if the
significant value > 0.05, it can be ascertained that the independent variable
individually cannot affect the dependent variable.
Table 7. Determination Coefficient Test Results
Model Summaryb
Model
R
R
Square
Adjusted R
Square
Std. Error of the
Estimate
Durbin-
Watson
1
0,527a
0,278
0,258
0,70826
1,899
a. Predictors: (Constant), SG, DER, ROA, CR, ROE
b. Dependent Variable: FINANCIALDISTRESS
Source: Processed Data using SPSS 25 (2022)
Based on table 7, it can be seen that from the test results the coefficient of
determination obtained an adjusted R2 value of 0.258 (25.8%). It can be concluded
that the profitability variables calculated using ROA and ROE, liquidity calculated
using CR, leverage calculated with DER, and sales growth are able to explain
financial distress by 25.8%, while 74.2% is explained by other variables excluding
related research.
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Research Discussion
The Effect of Profitability on Financial Distress
The research results of the first hypothesis indicate that the profitability
variable which can be measured using Return on Asset (ROA) and Return on Equity
(ROE) of H1 is accepted. The calculation of profitability using ROA has a
significant value of 0.000, which has a value smaller than 0.05 and the regression
coefficient owned by ROA is 0.234 with a positive direction. The calculation of
profitability using ROE can be seen from the significant value which indicates
0.012 which means that the value is smaller than 0.05 which is a requirement or
condition to determine whether or not the liquidity variable has an effect and has a
regression coefficient of 0.061 in a positive direction.
The Effect of Liquidity on Financial Distress
The results indicated that the liquidity variable which can be measured using
the Current Ratio (CR) has no effect on financial distress and H2 is rejected. The
ability of the company to be able to increase its liquidity value, the company will
be more liquid and healthy so that the company will further reduce the potential for
financial distress. However, if the company has low liquidity, the company must be
more concerned about the condition of its assets. If the company does not pay
careful attention to the condition of its profits and assets, there will be a risk that
the company will not be able to pay its short-term debt.
The Effect of Leverage on Financial Distress
The research that has been conducted by researchers indicates that the
leverage variable as measured using the Debt Equity Ratio (DER) has an effect on
financial distress and H3 is accepted. It is known because the significance value of
leverage is 0.000 which has a smaller value when compared to 0.05 and the
regression coefficient value is -0.350 with a negative direction, this causes the
leverage variable to affect financial distress.
The Effect of Sales Growth on Financial Distress
The result obtained indicates that the calculation of the sales growth variable
does not have an effect on financial distress and H4 is rejected. However, the
significant value is 0.925, which is greater than 0.05, and the value of the regression
coefficient is 0.000.
CONCLUSION
Based on this research, the profitability ratio as measured using Return on
Asset (ROA) has a positive effect on financial distress in trading sector companies
listed on the Indonesia Stock Exchange during 2019-2021. Meanwhile, the
profitability ratio as measured using Return on Equity (ROE) has a negative effect
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on financial distress in trading sector companies listed on the Indonesia Stock
Exchange during 2019-2021. Moreover, liquidity ratio as measured using Current
Ratio has no effect on financial distress in trading sector companies listed on the
Indonesia Stock Exchange during 2019-2021. On the other hand, sales growth ratio
conducted by this research indicates the results obtained that sales growth has no
effect on financial distress in trading sector companies listed on the Indonesia Stock
Exchange during 2019-2021. The company's ability to sell high will make the
company strong against companies in the market, therefore the higher the sales
value, the higher the profit the company will get and the company will avoid
financial distress.
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