Susmita Dian Indiraswari, Meisa Faiza Aulia, Ati Retna Sari

Profitability Moderates the Effect of Leverage, Liquidity, Activity, Operating Cash Flow, and Sales Growth on Financial Distress

Introduction

Profitability moderates the effect of leverage, liquidity, activity, operating cash flow, and sales growth on financial distress . Investigates profitability's moderating effect on leverage, liquidity, activity, operating cash flow, & sales growth on financial distress in Indonesian infrastructure firms. Provides key insights.

Abstract

This study aims to investigate the impact of leverage, liquidity, activity, operating cash flow, and sales growth on financial distress, as well as to examine whether profitability as a moderating variable can weaken or strengthen these effects. This quantitative study utilizes secondary data from 11 companies in the infrastructure, transportation, and logistics sectors that are listed on the Indonesia Stock Exchange from 2021 to 2023. This study uses Moderated Regression Analysis (MRA) with IBM SPSS Statistics version 25. The results indicate that leverage has a negative influence on financial distress, while liquidity has a positive impact. Additionally, activity has no significant effect, and operating cash flow and sales growth both have a negative impact on financial distress. Profitability is not effective in moderating the relationship between leverage, liquidity, and activity in terms of financial distress. Still, it can strengthen the negative effect of operating cash flow and sales growth on financial distress. This study implies that signaling theory is reinforced by the presence of high operating cash flows and consistent sales growth, which can signal a firm's ability to overcome financial distress. Building on this insight, this research aims to provide stakeholders with a foundation for informed decision-making and proactive corrective actions.

Review

This study meticulously investigates the complex interplay of several financial indicators—leverage, liquidity, activity, operating cash flow, and sales growth—on financial distress, with a particular focus on the moderating role of profitability. Employing a quantitative approach and Moderated Regression Analysis (MRA), the research utilizes secondary data from a specific subset of 11 infrastructure, transportation, and logistics companies listed on the Indonesia Stock Exchange between 2021 and 2023. The chosen methodology is appropriate for addressing the research questions regarding direct and moderating effects, providing a structured way to analyze these relationships. The findings present a nuanced picture: leverage, operating cash flow, and sales growth exhibit a negative influence on financial distress, while liquidity surprisingly shows a positive impact, and activity has no significant effect. Profitability's moderating role is selective; it strengthens the negative effect of operating cash flow and sales growth but does not significantly moderate the relationships involving leverage, liquidity, or activity. Notably, the study reinforces signaling theory, positing that robust operating cash flows and consistent sales growth serve as powerful signals of a firm's resilience against financial distress, offering a valuable theoretical contribution. While the study provides relevant insights for stakeholders and informed decision-making, certain limitations warrant consideration. The relatively small sample size of 11 companies and the short, recent timeframe (2021-2023) may restrict the generalizability of the findings and could be influenced by specific post-pandemic economic conditions. Furthermore, the counter-intuitive positive relationship between liquidity and financial distress, as well as the negative relationship between leverage and financial distress, would benefit from a more detailed contextual explanation in the full paper. Nevertheless, this research offers a valuable foundation for understanding the dynamics of financial distress within a specific industry context and prompts further investigation into these intricate relationships across broader samples and longer periods.

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