Liquidity and Financial Distress

Oct 13, 2025 by magicalceylontours.com 68 views

Analysis of the Effect of Liquidity, Leverage, Company Size, Operating Capacity, and Price Earning Ratio on Financial Distress in Consumer Goods Companies Listed on the Indonesia Stock Exchange (2017-2021)

Introduction

The Indonesia Stock Exchange (IDX) is one of the largest stock exchanges in Southeast Asia, with a wide range of companies listed across various sectors. Consumer goods companies are a significant segment of the IDX, accounting for a substantial portion of the market capitalization. However, these companies are not immune to financial distress, which can have severe consequences on their operations and stakeholders. This study aims to analyze the effect of liquidity, leverage, company size, operational capacity, and price earning ratio on financial distress in consumer goods companies listed on the IDX during the period 2017 to 2021.

Methodology

This study uses secondary data obtained from the annual reports published on the official website of the IDX (www.idx.co.id) and the website of each company. The sampling method used is saturated sampling, which produces 43 companies with a total of 215 observations. The analysis was carried out using descriptive statistical analysis, classic assumption test, multiple regression analysis, and hypothesis tests analyzed using EViews software version 12.

Liquidity and Financial Distress

Liquidity is the company's ability to fulfill its short-term obligations. In the context of this study, liquidity has a significant influence on financial distress. This shows that companies with a good level of liquidity tend to be more able to overcome the financial difficulties that arise. If the company's liquidity is low, it is likely that the company has difficulty in fulfilling its obligations will increase, which can lead to financial distress conditions. A company with high liquidity can easily meet its short-term obligations, such as paying bills and salaries, without having to rely on external funding. This is in line with the concept of liquidity, which is the ability of a company to meet its short-term obligations without incurring significant costs.

Leverage and Financial Distress

Leverage refers to the use of debt to finance company assets. This study found that leverage also had a significant influence on financial distress. Companies with a high level of leverage are at greater risk of experiencing financial distress, because high debt can burden the company's cash flow. Conversely, companies with lower levels of debt tend to have a lower financial distress risk, so it is more stable in its operations. A company with high leverage may struggle to meet its debt obligations, which can lead to financial distress. This is because high debt can reduce a company's ability to invest in new projects and maintain its operations.

Company Size

The size of the company measured through total assets or income has a significant influence on financial distress. Larger companies usually have more resources and the ability to deal with financial pressure. Thus, the company's size is an important factor in determining the level of risk of financial distress encountered. A larger company may have more resources to absorb financial shocks, making it less likely to experience financial distress. This is because larger companies tend to have more diversified revenue streams and a more stable cash flow.

Operational Capacity

Operational capacity includes the company's ability to produce efficient quantities of goods and services. The results showed that operational capacity also had a significant effect on financial distress. Companies that are able to optimize their production capacity can better manage costs and generate profits, which in turn reduces the risk of financial distress. A company with high operational capacity can produce goods and services efficiently, which can lead to higher profits and lower costs. This is because operational capacity is directly related to a company's ability to produce goods and services efficiently.

Price Earning Ratio (PER)

Meanwhile, the price ratio of profit ratio does not show a significant effect on financial distress in this study. This could be caused by the nature of the PER which is more speculative and influenced by broader market factors, compared to company internal factors such as liquidity, leverage, size, and operational capacity. The price earning ratio is a market-based metric that reflects the market's expectations of a company's future performance. This is in contrast to company internal factors, which are more directly related to a company's financial performance.

Conclusion

From the research results it can be concluded that liquidity, leverage, company size, and operational capacity have a significant influence on financial distress in consumer goods companies listed on the IDX. Conversely, the price ratio to profit does not show a significant effect. These findings provide a clear picture of the factors that must be considered by company management in an effort to reduce the risk of financial distress. As a further step, companies should focus on managing good liquidity, control debt, and optimize their capacity and size to increase competitiveness and financial stability.

Recommendations

Based on the findings of this study, the following recommendations are made:

Companies should prioritize managing their liquidity to ensure they have sufficient funds to meet their short-term obligations.
Companies should control their debt levels to avoid burdening their cash flow and increasing the risk of financial distress.
Companies should optimize their operational capacity to produce goods and services efficiently and reduce costs.
Companies should focus on increasing their size and resources to absorb financial shocks and reduce the risk of financial distress.

By implementing these recommendations, companies can reduce the risk of financial distress and improve their financial stability.
Frequently Asked Questions (FAQs) on the Effect of Liquidity, Leverage, Company Size, Operating Capacity, and Price Earning Ratio on Financial Distress in Consumer Goods Companies Listed on the Indonesia Stock Exchange (2017-2021)

Q: What is the main objective of this study?

A: The main objective of this study is to analyze the effect of liquidity, leverage, company size, operational capacity, and price earning ratio on financial distress in consumer goods companies listed on the Indonesia Stock Exchange (IDX) during the period 2017 to 2021.

Q: What is the significance of this study?

A: This study is significant because it provides insights into the factors that affect financial distress in consumer goods companies listed on the IDX. The findings of this study can help company management and investors make informed decisions about investing in these companies.

Q: What are the key findings of this study?

A: The key findings of this study are that liquidity, leverage, company size, and operational capacity have a significant influence on financial distress in consumer goods companies listed on the IDX. Conversely, the price ratio to profit does not show a significant effect.

Q: What are the implications of this study?

A: The implications of this study are that companies should prioritize managing their liquidity, controlling their debt levels, optimizing their operational capacity, and increasing their size and resources to reduce the risk of financial distress.

Q: What are the limitations of this study?

A: The limitations of this study are that it only analyzed data from consumer goods companies listed on the IDX during the period 2017 to 2021. Future studies can expand the scope of the study to include other sectors and time periods.

Q: What are the recommendations of this study?

A: The recommendations of this study are that companies should:

Prioritize managing their liquidity to ensure they have sufficient funds to meet their short-term obligations.
Control their debt levels to avoid burdening their cash flow and increasing the risk of financial distress.
Optimize their operational capacity to produce goods and services efficiently and reduce costs.
Focus on increasing their size and resources to absorb financial shocks and reduce the risk of financial distress.

Q: What are the future research directions based on this study?

A: The future research directions based on this study are to:

Expand the scope of the study to include other sectors and time periods.
Analyze the effect of other factors on financial distress, such as market conditions and industry trends.
Develop a predictive model to forecast financial distress in consumer goods companies listed on the IDX.

Q: What are the practical implications of this study for company management and investors?

A: The practical implications of this study for company management and investors are that they should:

Monitor their company's liquidity, leverage, size, and operational capacity to reduce the risk of financial distress.
Make informed decisions about investing in consumer goods companies listed on the IDX based on their financial health and stability.
Develop strategies to improve their company's financial performance and reduce the risk of financial distress.

By understanding the factors that affect financial distress in consumer goods companies listed on the IDX, company management and investors can make informed decisions about investing in these companies and reduce the risk of financial distress.