BANKRUPTCY PREDICTION MODEL DEVELOPMENT USING FINANCIAL RATIOS: AN EMPIRICAL STUDY OF INDONESIAN COMPANIES LISTED ON THE IDX IN GOODS, SERVICE, APPREAL, AND LUXURY SECTORS (2014 – 2023)

Abstract

This study aims to develop a bankruptcy prediction model tailored to the manufacturing sector in Indonesia, focusing on goods, services, luxury goods, and apparel companies in the Indonesia Stock Exchange (IDX) from 2014 to 2023. The model utilizes six financial ratios: Operating Cash Flow/Revenue, Working Capital/Total Assets, Retained Earnings/Total Assets, Accounts Receivable/Current Liabilities, Book Value of Equity/Book Value of Debt, and Inventory/Sales. Out of 83 data companiew, 16 were selected, with 8 experiencing significant financial losses over 5-6 years and 8 others not. The model was developed using multiple linear regression to calculate the relationship between financial ratios and the likelihood of bankruptcy. The results indicate that Retained Earnings/Total Assets and Operating Cash Flow/Revenue are significant predictors of bankruptcy, while the other ratios are not significant. The model identifies threshold values that categorize companies into three groups: bankrupt, grey area, and non-bankrupt, with threshold values of -0.0670 and 0.2816. The model’s accuracy was tested using the Binary Logistic method with SPSS, showing that when the grey area is considered bankrupt, the accuracy without predictors is 68.8% and with predictors is 100%. When the grey area is considered non-bankrupt, the accuracy without predictors is 78.8% and with predictors is 100%. This study provides a valuable tool for investors, creditors, and management to assess the financial health of companies. However, it acknowledges limitations related to data normality and multicollinearity and recommends further research to improve the model's accuracy.