The effect of leverage, activity, profitability, growth, and firm size on financial distress

Abstract

Purpose: This study was to determine the effect of leverage, activity, profitability, growth, and firm size on financial distress in industrial sector companies in Indonesia in 2018–2021. Financial distress is a stage of decline in the financial condition of a company that is experiencing financial difficulty problems.

Methods: Financial distress is the dependent variable, while Ieverage, activity, profitability, growth, and firm size are independent variables. The population of this study are industrial sector companies listed on the Indonesia Stock Exchange (IDX) in 2018–2021. The sample was determined using nonprobability and purposive sampling methods. The number of samples used was 47 companies, and the total observation data during the 2018-2021 period was 148 observation data.

Findings: The results showed that Profitability (ROA) has a significant positive effect on financial distress. Meanwhile, Leverage (DER), Activity (TATO), Growth (Sales Growth), and Firm Size have no impact on financial distress in industrial sector companies listed on the IDX for the period 2018-2021.

Practical implications: The study indicates that Return on Assets (ROA) has a significant positive effect on financial distress. In contrast, the Debt-to-Equity Ratio (DER), Total Asset Turnover (TATO), Sales Growth, and Company Size do not have any effect. Therefore, companies should prioritize increasing profitability through effective cost management and operational efficiency while being cautious about their debt structures. Management should also regularly monitor financial indicators and invest in financial management training to mitigate the risk of financial distress and support sustainable growth.