Optimize asset utilization

Oct 13, 2025 by vinooalluri.com 6 views

The Effect of Liquidity, Profitability, Solvency, and Activity Ratios on Financial Distress in Agribusiness Companies Listed on the Indonesia Stock Exchange in 2017-2021

Introduction

Financial distress is a significant concern for companies, particularly in the agribusiness sector, where fluctuations in market prices and weather conditions can have a substantial impact on their financial stability. The ability of companies to manage their finances effectively is crucial in preventing financial distress. This study aims to investigate the effect of liquidity ratio, profitability ratio, solvency ratio, and activity ratio on financial distress in agribusiness companies listed on the Indonesia Stock Exchange during the 2017 to 2021 period.

Methodology

This study uses a descriptive approach with quantitative data obtained through literature documentation and study. The population in this study consisted of 15 agribusiness companies during that period, with the sampling method using the saturated sampling technique. The study aims to test and determine the effect of liquidity ratio, profitability ratio, solvency ratio, and activity ratio to financial distress in agribusiness companies listed on the Indonesia Stock Exchange during the 2017 to 2021 period.

Results

The results of this study showed that the liquidity ratio had a positive and significant influence on financial distress, while the profitability ratio had a negative but insignificant influence. On the other hand, the solvency ratio also shows positive and significant effects, while the activity ratio has a negative and significant effect on financial distress in agribusiness companies listed on the Indonesia Stock Exchange in the same period.

Deeper Analysis

Liquidity Ratio

The liquidity ratio, which shows the company's ability to fulfill its short-term obligations, is proven to have a positive and significant influence on financial distress. This means, the higher the company's liquidity, the lower the risk of financial distress it faces. Companies with good liquidity are able to manage their cash flow more efficiently, so as to avoid difficulties in fulfilling short-term obligations. For instance, a company with a high liquidity ratio can easily pay its short-term debts, such as accounts payable and taxes, without having to worry about running out of cash. This can help to reduce the risk of financial distress and improve the company's overall financial stability.

Profitability Ratio

Although the profitability ratio does not show a significant effect on financial distress, it is important to note that this ratio still plays a role in assessing the company's overall performance. When the profitability ratio increases, companies tend to have more resources to be invested, although this does not directly reduce the risk of financial distress. For example, a company with a high profitability ratio may have more resources to invest in research and development, marketing, and other areas that can help to improve its financial performance. However, this does not necessarily mean that the company is less likely to experience financial distress.

Solvency Ratio

The solvency ratio that has a positive and significant influence shows that companies with the ability to meet their long-term obligations have a lower financial distress risk. Companies that are able to manage debt well tend to be more stable in dealing with uncertain economic conditions. For instance, a company with a high solvency ratio can easily pay its long-term debts, such as bonds and loans, without having to worry about defaulting on its obligations. This can help to reduce the risk of financial distress and improve the company's overall financial stability.

Activity Ratio

The activity ratio shows how efficient the company is in using its assets to generate income. The negative and significant influence of this ratio on financial distress shows that companies that are less efficient in the use of assets have a higher risk of financial distress. Therefore, companies need to maximize the use of their assets in order to support operational sustainability. For example, a company that is able to use its assets more efficiently may be able to generate more revenue and reduce its costs, which can help to improve its financial performance and reduce the risk of financial distress.

Conclusion

From the results of this study, it can be concluded that the liquidity and solvency ratio has a significant positive influence on financial distress in agribusiness companies listed on the Indonesia Stock Exchange, while the profitability ratio does not have a significant effect, and the ratio of activities shows negative effects. These findings are very important for stakeholders, including investors and company management, in decision making relating to the financial stability and operations of agribusiness companies in Indonesia. By understanding the effect of each ratio, companies can better prepare strategies to reduce the risk of financial distress in the future.

Recommendations

Based on the findings of this study, the following recommendations can be made:

Improve liquidity: Companies should focus on improving their liquidity by managing their cash flow more efficiently and reducing their short-term debt.
Enhance solvency: Companies should focus on enhancing their solvency by managing their long-term debt and improving their creditworthiness.
Optimize asset utilization: Companies should focus on optimizing the use of their assets to generate more revenue and reduce costs.
Monitor profitability: Companies should monitor their profitability ratio to ensure that they are generating sufficient resources to invest in their business.

By implementing these recommendations, companies can reduce the risk of financial distress and improve their overall financial stability.
Frequently Asked Questions (FAQs) about the Effect of Liquidity, Profitability, Solvency, and Activity Ratios on Financial Distress in Agribusiness Companies

Q: What is financial distress, and why is it a concern for agribusiness companies?

A: Financial distress refers to a company's inability to meet its financial obligations, such as paying debts or meeting financial commitments. It is a concern for agribusiness companies because it can lead to bankruptcy, loss of market share, and damage to the company's reputation.

Q: What are liquidity, profitability, solvency, and activity ratios, and how do they relate to financial distress?

A: Liquidity ratio measures a company's ability to meet its short-term obligations. Profitability ratio measures a company's ability to generate profits. Solvency ratio measures a company's ability to meet its long-term obligations. Activity ratio measures a company's efficiency in using its assets to generate income. These ratios are important because they can help companies identify areas where they need to improve to reduce the risk of financial distress.

Q: What are the key findings of this study, and what do they mean for agribusiness companies?

A: The study found that liquidity and solvency ratios have a significant positive influence on financial distress, while profitability ratio does not have a significant effect, and activity ratio shows negative effects. This means that agribusiness companies that have good liquidity and solvency ratios are less likely to experience financial distress, while those with poor activity ratios are more likely to experience financial distress.

Q: What are the implications of this study for investors and company management?

A: The study's findings have important implications for investors and company management. Investors should consider a company's liquidity and solvency ratios when making investment decisions, as these ratios can indicate a company's ability to meet its financial obligations. Company management should focus on improving liquidity and solvency ratios, as well as optimizing asset utilization, to reduce the risk of financial distress.

Q: What are some strategies that agribusiness companies can use to improve their liquidity and solvency ratios?

A: Some strategies that agribusiness companies can use to improve their liquidity and solvency ratios include:

Managing cash flow more efficiently
Reducing short-term debt
Improving creditworthiness
Enhancing solvency by managing long-term debt
Optimizing asset utilization to generate more revenue and reduce costs

Q: What are some strategies that agribusiness companies can use to improve their profitability ratio?

A: Some strategies that agribusiness companies can use to improve their profitability ratio include:

Increasing revenue through sales and marketing efforts
Reducing costs through efficiency improvements and cost-cutting measures
Investing in research and development to improve product quality and reduce costs
Diversifying products and services to reduce dependence on a single market or product

Q: What are some strategies that agribusiness companies can use to improve their activity ratio?

A: Some strategies that agribusiness companies can use to improve their activity ratio include:

Optimizing asset utilization to generate more revenue and reduce costs
Improving efficiency through process improvements and automation
Reducing waste and improving supply chain management
Investing in technology to improve productivity and reduce costs

Q: What are some limitations of this study, and what are some areas for future research?

A: Some limitations of this study include:

The study only examined a small sample of agribusiness companies listed on the Indonesia Stock Exchange.
The study only examined a specific time period (2017-2021).
The study did not examine the impact of other factors, such as market conditions and government policies, on financial distress.

Some areas for future research include:

Examining the impact of other factors, such as market conditions and government policies, on financial distress.
Examining the impact of financial distress on company performance and market outcomes.
Examining the effectiveness of different strategies for improving liquidity, solvency, profitability, and activity ratios.