Factors Affecting Financial Distress in Small and Medium Enterprises (SMEs) in Indonesia: An Empirical Study

Abstract

Aims: The research conducted aims to see the effect of financial ratios in the ability to predict the possibility of a company in experiencing financial distress. Study Design: The independent variables in this study are leverage, liquidity and profitability. The control variables consist of firm size and age of the company while the dependent variable is financial distress as measured by the Z-score. Place and Duration of Study: The sample used in this research is a company listed on the 2017-2021 PEFINDO index on Bursa Efek Indonesia. Methodology: The number of samples used were 65 companies with a total of 325 observations using purposive sampling. Results: The results showed that leverage had a positive significant effect on financial distress meanwhile profitability and age had a negative significant effect on financial distress. Conclusion: The company is expected to minimize the use of leverage which used to fund total assets. In addition, the company is expected to be able to increase company's net profit to minimize it’s possibility in experiencing financial distress and companies with a mature age to keep maintaining leverage and profitability in order to avoid the risk of financial distress. Investors are expected to choose companies by looking at low leverage ratios, high profitability, and companies with old ages so that the risk of investment can be minimized. The government is expected to be able to provide capital to companies so that the company's leverage can be lower as well as an increase company’s profitability as a result of increasing company productivity in doing business.