THE EFFECT OF SOLVENCY, PROFITABILITY, LIQUIDITY, OPERATING CASH FLOW, AND INTEREST COVERAGE RATIO ON FINANCIAL DISTRESS (EMPIRICAL STUDY IN AVIATION COMPANIES)

Talitha, Zahra Mumtaz and Safnil, Safnil and Novitasari, Novitasari (2023) THE EFFECT OF SOLVENCY, PROFITABILITY, LIQUIDITY, OPERATING CASH FLOW, AND INTEREST COVERAGE RATIO ON FINANCIAL DISTRESS (EMPIRICAL STUDY IN AVIATION COMPANIES). Undergraduated thesis, Universitas Bengkulu.

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Abstract

Financial distress is a problem that the company must watch out for. Ifthe company experiences financial distress, the company hasthe potential to experience bankruptcy. Therefore, it is necessary to make periodic predictions regarding the company's financial performance. Various characteristics that can beseen regarding the company's condition indicate that it is experiencing financial distress, such as delaying debt payments, experiencing increased losses over severalyears, and the existence of an incorrect company financial structure that causes liquidity limits. Financial distress as a potential bankruptcy is an important issue, so many models have been developed to predict this situation. Some of these modelsinclude Altman, Springate, and Zmijewski. Apart from using a bankruptcy prediction model, some variables influence the occurrence of financial distress. It is essential to know the effect of this variable because it can be used as an alternativeto improving the company's financial distress. This study uses secondary data from airlines. The data used includes the quarterly financial reports for the 2019-2021 period, which were obtained through the website ofthe stock exchange of each country and the website of each company. The research sample includes 32 companies with 384 observations. Data analysis was performed using a logistic regression model and Altman, Springate, and Zmijewski approach to classify companies. The study results show that solvency positively affects financial distress when measured by the Altman and Zmijewski approach. This shows that the lower level of solvency, the higher chance of financial distress. Liquidity negatively affects financial distress when measured by the Altman approach. This shows that the higher level of liquidity, the lower chance of financial distress. Profitability negatively affects financial distress when measured by the Altman, Springate, and Zmijewski approaches. This means that the higher level of profitability, the lower chance of financial distress. This study shows that operating cash flow negatively affects financial distress when measured by the Springate approach. This means that the higher level of operating cash flow, the lower chance of financial distress. The interest coverage ratio negatively affects financial distress when measured by The Zmijewski approach. This showsthat the higher the interest coverage ratio, the lower the chance of financial distress. Therefore, the most accurate company classification model for identifying financial distress in this study is the Zmijewski model. The theory tested in this study is normative accounting theory. The results of this study can confirm that the general purpose of financial reports is to provide information about the financial position, financial performance, and cash flow. In this study, the financial statement information used included total debt, total assets, current assets, current liabilities, profit before tax, operating cash flow, earnings before interest tax, and debt burden, which became a source of information for researchers in calculating the level of financial distress for all samples. The limitations of this study are the population of aviation companies is still relatively small to list companies experiencing financial distress successively, so it is recommended to expand the research population, such as non-financial companies witha broader population. And suggestions for further research are recommended to add another measurement in calculating solvency and other variables in measuring profitability

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