THE EFFECT OF FINANCIAL RATIOS TOWARDS FINANCIAL DISTRESS PREDICTION ON INDONESIA’S PHARMACEUTICAL INDUSTRY

Abstract

This research aimed to analyze the effect of financial ratios on financial distress prediction on Indonesia’s pharmaceutical industry partially and simultaneously. There are five independent variables within this research which are being examined by descriptive statistical analysis, classical assumption test, multiple linear regression, and hypothesis testing. In selecting the observation data, the purposive sampling method and panel data are being used in this research, where the data were collected from company’s official website. Adopting quantitative research and has 80 units of observation data from 5 samples from 2014Q1 – 2017Q4. Financial ratios used within this research are inventory turnover, debt to asset ratio, return on asset and cash flow coverage ratio. Meanwhile, earning per share is being chosen as the proxy for predicting financial distress condition, due to it is such a good indicator of any organization's profitability and is one of the most commonly used profitability measures. The result reveals the value of adjusted R-squared among inventory turnover, debt to asset ratio, return on asset and cash flow coverage ratio is 85.8783% simultaneously affecting the financial distressed prediction. The result determined as well if only the cash flow coverage ratio that is not significant to predict financial distress probability for selected samples and it shows if return on assets ratio is the most significant factor towards financial distress prediction.