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. Keywords—profitability, liquidity, leverage, financial distress