The Effect of Current Ratio and Debt to Equity Ratio on Financial Distress in the Media and Entertainment Subsector

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Banten— Liquidity and Debt Ratios Fail to Predict Financial Distress in Indonesia’s Media and Entertainment Firms. The research conducted by Nindie Ellesia and Ratna Dumilah from Universitas Pamulang, published in January 2026 in the International Journal of Education and Life Sciences (IJELS).

The research conducted by Nindie Ellesia and Ratna Dumilah revealed that popular financial indicators such as the Current Ratio (CR) and Debt to Equity Ratio (DER) are not strong enough to predict financial distress in companies within the media and entertainment subsector listed on the Indonesia Stock Exchange (IDX).

This research is important because Indonesia’s media and entertainment industry is growing rapidly, driven by a surge in digital content consumption, streaming, e-sports, and the creative economy. However, industry growth does not always align with the financial health of all companies within it. Some listed companies remain at risk of experiencing financial pressure, even when the market appears promising.

What Financial Distress Means—and Why Investors Should Care

Financial distress refers to a condition where a company begins to lose its financial stability and struggles to meet its obligations.

The authors explain that financial distress is often seen as the “pre-bankruptcy stage.” Companies in this phase may face liquidity problems, heavy debt pressure, or declining operational performance.

For investors and creditors, financial distress matters because it can lead to:

• declining stock value,
• reduced market confidence,
• limited access to new funding,
• and in severe cases, bankruptcy or liquidation.

Main Findings: CR and DER Are Not Significant Predictors

The results were consistent and clear.

Simultaneous Effect (F-Test)

The F-test showed that CR and DER together do not significantly affect financial distress.

Partial Effect (t-Test)

Individually, neither ratio was statistically significant:

• CR significance value: 0.8855 (> 0.05)
• DER significance value: 0.1475 (> 0.05)

This means that even if a company has a high liquidity ratio or a high debt ratio, it does not automatically translate into distress status under the Altman Z-Score classification.

Why Liquidity and Debt Ratios May Not Work in This Industry

The authors suggest several reasons why CR and DER may not be strong predictors in this case.

One major factor is the limited sample size. Only three companies met the complete reporting criteria across the seven-year period. This limitation may reduce the statistical power of the results.

Another explanation lies in the unique structure of media and entertainment companies. Many firms in this industry depend on:

• intangible assets such as broadcasting rights, content libraries, and intellectual property,
• revenue streams that fluctuate strongly based on trends,
• advertising income that is sensitive to economic cycles,
• digital platform expansion that requires high upfront costs.

These characteristics can make traditional liquidity and debt ratios less informative compared to other sectors such as manufacturing or banking.

What This Means for Investors and Business Leaders

The study delivers a practical message:

Investors should not rely only on CR and DER when evaluating distress risk in media and entertainment firms.

Instead, they may need to combine ratio analysis with broader indicators such as:

• operating cash flow,
• profitability measures (ROA, ROE),
• earnings stability,
• revenue growth from digital products,
• and business model resilience.

For business leaders, the findings suggest that improving company health is not just about “fixing ratios,” but about building sustainable revenue and managing volatility.

Study Limitations and Recommendations

Ellesia and Dumilah clearly acknowledge that the research has limitations.

The study:

1. used only two independent variables (CR and DER),
2. relied on a small sample (3 firms),
3. focused only on quantitative analysis.

They recommend that future studies:

• expand the sample size,
• use a longer observation period,
• include additional variables,
• and consider mixed-method approaches to better understand distress dynamics.

Author Profiles

• Nindie Ellesia -  Universitas Pamulang
  
• Ratna Dumilah -  Universitas Pamulang
  

Research Source

Nindie, Ratna. The Effect of Current Ratio and Debt to Equity Ratio on Financial Distress in the Media and Entertainment Subsector
International Journal of Education and Life Sciences (IJELS)Vol. 4, No. 1
DOI:https://doi.org/10.59890/ijels.v4i1.257                                                                                     URL: https://ntlmultitechpublisher.my.id/index.php/ijels