Profitability Moderates the Effect of Firm Size, Leverage, and Liquidity on Financial Distress

Rido Luspratama, Yusuf Ronny Edward and Namira Ufrida Rahmi
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Rido Luspratama: Universitas Prima Indonesia, Medan, Indonesia
Yusuf Ronny Edward: Universitas Prima Indonesia, Medan, Indonesia
Namira Ufrida Rahmi: Universitas Prima Indonesia, Medan, Indonesia

Oblik i finansi, 2023, issue 3, 53-64

Abstract: A condition in which a company cannot generate sufficient profits, making it unable to meet or pay its financial obligations, is called financial distress. This is typically due to high fixed costs, a high degree of illiquid assets, or revenues sensitive to economic downturns. Financial distress needs to be studied further as it can provide considerations regarding the company's financial conditions and performance before investing to reduce opportunities for investment losses. The financial distress value can also be a benchmark of whether the company management can manage all company assets, effectively and efficiently control costs, and check opportunities for business development. This research aims to determine the effect of company size, leverage and liquidity on financial distress with profitability as a moderating variable. This research used a purposive sampling technique on food and beverage subsector manufacturing companies with a total population of 41 companies into 17 samples with a research period from 2018-2021. The research results show that leverage has a negative and significant effect on financial distress; instead, company size and liquidity have a positive and significant effect on financial distress. Profitability can moderate the influence of company size and liquidity on financial distress but cannot moderate the influence of leverage on financial distress. So, manufacturing companies in the food and beverage sub-sector need to consider company size, leverage, and liquidity as a reference to avoid financial distress. They need to conduct market analysis to understand growth potential and demand before increasing the company's size. Investors need to choose companies with an appropriate size, stable market share, and reasonable leverage ratio for their investments to be successful.

Keywords: firm size; leverage; liquidity; profitability; financial distress; company's financial conditions (search for similar items in EconPapers)
JEL-codes: G32 G39 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:iaf:journl:y:2023:i:3:p:53-64

DOI: 10.33146/2307-9878-2023-3(101)-53-64

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