Predicting Financial Distress in the Indonesian Retail Industry

Abstract

The threat of financial distress necessitates that companies develop
appropriate strategies to anticipate conditions that may lead to financial
instability. One effective method for predicting financial distress is
through the analysis of financial ratios. This study focuses on four key
financial ratios: operating capacity, profitability, leverage, and cash flow,
to examine their predictive power regarding financial distress. The
research encompasses the entire population of retail sector companies in
Indonesia, with data spanning from 2019 to 2022. The findings indicate
that all four variables—operating capacity, profitability, leverage, and
cash flow—are significant predictors of financial distress. Specifically,
operating capacity, profitability, and cash flow exhibit a negative
relationship with financial distress, suggesting that higher values in
these variables are associated with lower financial distress risk.
Conversely, leverage demonstrates a positive relationship, indicating
that higher leverage increases the risk of financial distress. In conclusion,
the study underscores the importance of these financial ratios in
predicting financial distress within Indonesia's retail industry,
highlighting the need for companies to monitor and manage these
variables proactively to mitigate potential financial challenges.