The Influence of Liquidity ratio and Leverage ratio on Financial Distress in The Apparel and Luxury Goods Sub-sector

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Banten— Liquidity and Leverage Ratios Help Predict Financial Distress in Indonesia’s Apparel and Luxury Firms. The research conducted by Ratna Dumilah from Universitas Pamulang, published in January 2026 in the International Journal of Management Analytics (IJMA).

The research conducted by Ratna Dumilah shows that two simple indicators—Current Ratio (CR) and Debt to Equity Ratio (DER)—can be used to identify early signs of financial distress or conditions of financial difficulty in companies. The results are important because financial distress often emerges earlier before a company falls into more severe conditions such as default, prolonged losses, or even bankruptcy.

What Is Financial Distress and Why It Matters

Financial distress is widely understood as an early-stage financial crisis. It happens when a company begins to experience serious difficulty paying obligations, particularly short-term debts.

This stage is important because it often appears before bankruptcy. If companies can detect distress early, they can take corrective action such as:

• restructuring debt
• cutting operational costs
• improving working capital
• revising capital structure

Dumilah’s research builds on the idea that financial ratios can serve as “signals” to stakeholders. In Signal Theory, financial conditions provide information to investors and the public about the company’s future risk and performance.

Simple Financial Ratios Used in the Study

The study focused on two widely used financial ratios:

1. Current Ratio (CR)

A liquidity ratio showing how capable a company is in paying short-term obligations using current assets.

Formula:
CR = (Current Assets / Current Liabilities) × 100%

2. Debt to Equity Ratio (DER)

A leverage ratio measuring how much a company relies on debt compared to its own equity.

Formula:
DER = (Total Debt / Equity) × 100%

Financial Distress Measurement

To measure financial distress, Dumilah used the Altman Z-Score model, a well-known method for classifying companies into:

• Safe Zone (Z-score > 2.99)
• Gray Area (1.81–2.99)
• Distress Zone (Z-score < 1.81)

Main Findings: Liquidity Matters More Than Leverage (Individually)

The regression model produced this equation:

Z-Score (Financial Distress) = -2.465039 + 0.011180(CR) + 0.000325(DER)

Key Results

✅ Current Ratio significantly affects financial distress

• t-statistic CR: 2.382174
• probability: 0.0263 (< 0.05)

This means the company’s liquidity condition strongly influences whether it moves toward distress.

❌ Debt to Equity Ratio was not significant individually

• t-statistic DER: 0.891224
• probability: 0.3825 (> 0.05)

DER alone did not show a strong statistical effect when tested separately.

But Together, CR and DER Strongly Explain Financial Distress

Even though DER was not significant individually, the combined test (F-test) showed that CR and DER together significantly affect financial distress.

• F-statistic: 47.77315
• probability: 0.000000 (< 0.05)

The model also had a very high explanatory power:

• Adjusted R-square: 0.918633

This indicates that CR and DER explain about 91.86% of the variation in financial distress in the sample companies.

In practical terms, Dumilah’s findings suggest that financial distress in the apparel and luxury subsector is heavily connected to how firms manage liquidity and capital structure.

Why This Matters for Business and Investors

1. For company managers

The results underline one crucial message: poor liquidity is dangerous.

Even companies with strong brands and market demand can collapse if they cannot pay:

• suppliers
• short-term loans
• wages
• operational expenses

2. For investors

Liquidity ratios like CR may serve as an early warning signal when screening companies. Dumilah’s research supports the idea that CR can be a more reliable indicator than DER in detecting distress risk in this subsector.

3. For policymakers and regulators

Since the apparel and textile industry contributes significantly to Indonesia’s GDP and employment, financial distress in this sector can lead to:

• layoffs
• supplier chain disruptions
• reduced tax contribution
• reduced investor confidence

Study Limitations and Future Directions

Dumilah acknowledged several limitations:

1. The study relied only on numerical secondary data, limiting deeper exploration of internal company factors.
2. Only two independent variables were used, while financial distress is often influenced by many factors.
3. Annual reports may not fully reflect internal financial realities.

She suggested future research could improve results by adding more variables, expanding industries, or using mixed methods.

Author Profile

Ratna Dumilah : Universitas Pamulang

Research Source

Ratna Dumilah “The Influence of Liquidity Ratio and Leverage Ratio on Financial Distress in The Apparel and Luxury Goods Sub-sector”
International Journal of Management Analytics (IJMA) Vol. 4 No. 1, Januari 2026 121–130
DOI:https://doi.org/10.59890/ijma.v4i1.221                                                                                URL: https://dmimultitechpublisher.my.id/index.php/ijma