Financial Ratios and Corporate Governance as Determinants of Financial Distress Probability: Evidence from Indonesian Manufacturing Firms
Abstract
This study aims to examine the effects of financial ratios and corporate governance on the probability of financial distress among manufacturing companies listed on the Indonesia Stock Exchange during the 2020–2025 period. Financial ratios are represented by profitability, liquidity, leverage, and activity ratios, while corporate governance is proxied by the proportion of independent commissioners. This study employed a quantitative research approach using secondary data obtained from the annual financial statements of manufacturing companies listed on the Indonesia Stock Exchange. The sample consisted of 900 firm-year observations selected through purposive sampling. Data were analyzed using binary logistic regression to estimate the probability of financial distress. Prior to hypothesis testing, the model was evaluated through multicollinearity testing, overall model fit, Hosmer–Lemeshow goodness-of-fit test, classification accuracy, receiver operating characteristic (ROC) analysis, and the Nagelkerke R-square coefficient. The results reveal that profitability, measured by Return on Assets (ROA), and activity ratio, measured by Total Asset Turnover (TATO), have a significant negative effect on the probability of financial distress, indicating that firms with higher profitability and more efficient asset utilization are less likely to experience financial distress. Conversely, leverage, measured by the Debt-to-Equity Ratio (DER), has a significant positive effect, suggesting that greater reliance on debt financing increases the likelihood of financial distress. In contrast, liquidity, measured by the Current Ratio (CR), and corporate governance, proxied by the proportion of independent commissioners, do not have a statistically significant effect on financial distress. The findings highlight that profitability, leverage, and asset utilization are key determinants of financial distress, whereas short-term liquidity and board independence are insufficient to explain financial distress among Indonesian manufacturing firms. These findings provide valuable insights for corporate managers, investors, creditors, and policymakers in identifying early warning indicators of financial distress and strengthening corporate financial sustainability.