TABLE OF CONTENT

TABLE OF CONTENT............................................................................................i
CHAPTER 1 INTRODUCTION............................................................................1
1.1

Background...............................................................................................1

1.2

Problem Identification...............................................................................5

1.3

Purpose of Study.......................................................................................5

1.4

Benefit of study.........................................................................................6

CHAPTER 2 THEORITICAL FRAMEWORK.....................................................7

2.1 Financial Distress...........................................................................................7
2.2 Altman Z Score...............................................................................................8
2.2.1 Working Capital / Total Assets...............................................................10
2.2.2 Retained Earning / Total Assets.............................................................11
2.2.3 Earning Before Interest and Tax / Total Assets......................................11
2.2.4 Market Value of Equity / Book Value of Total Debt..............................11
2.2.5 Sales / Total Assets................................................................................12
2.3 Research Framework....................................................................................12
2.4 Hypothesis Development.............................................................................15
2.4.1 The influence of Working Capital / Total Asset to Financial Distress...15
2.4.2 The influence of Retained Earning / Total Assets to Financial Distress16
2.4.3 The influence of Earning Before Interest and Taxes / Total Assets to
Financial Distress............................................................................................16
2.4.4 The influence of Market Value of Equity / Book Value of Total Debt to
Financial Distress............................................................................................16
2.4.5 The influence of Sales / Total Assets to Financial Distress...................17
CHAPTER 3 RESEARCH METHODOLOGY...................................................18
3.1

Research Design......................................................................................18

3.2

Variable Operationalization.....................................................................19

3.3

Population and Sample............................................................................20

3.4

Type and Source of Data.........................................................................20

3.5

Data Collection Method..........................................................................20

3.6

Data Analysis Method.............................................................................21

3.6.1

Descriptive Statistical Analysis........................................................21

3.6.2

Determination of Z Score.................................................................21

3.6.3

Correlation Test................................................................................22

3.6.4

Regression Analysis.........................................................................22

References..............................................................................................................23
Appendix................................................................................................................24

CHAPTER 1
INTRODUCTION
1.1

Background
Non-Bank financial company in Indonesia has undergone development and

continuous to growth. This is shown by growth in total assets and profit in 2013
for all non-bank financial company in Indonesia. In total assets, it is increase for
21.40% from previous year and in profit there is improvement for 18.94% from
previous research.Growth of this type of company is caused by several factors.
Such as increase in per capital personal income that cause rise in peoples ability
to buy insurance or invest their money for retirement program. Other factor that
causesgrowth in non-bank financial company is developmentin industry and
technology. This growth attracts investor to invest in non-bank financial company,
but investor should be careful in considering which company they should invest.
Based on OtoritasJasaKeuanganannouncement No. PENG-01/NB.2/2014, OJK
suspended business activities of Tata International Multi Finance because this
company has a problem with its capital.
The main objective of company is increasing companys value by having a
growth every single year of production(Handajani, 2013). In order to achieve this
objective, company needs capital to generate income. Company is using
combination of short-term debt, long-term debt, share capital-ordinary and share
capital-preferred, called capital structure, to finance its operation. In most of
Pasific Rim Countries, commercial banks are more actively involved in

companys activities which mean long-term debt is companys favorite source to

finance its operation. That is because company has to pay interest to the bank and
the company is allowed to deduct interest expense when calculating Earning
Before Interest and Tax (EBIT) and it will increase its Earning Available for
Stockholder (Lawrence&Chad,2010).
Even using long-term debt as main source of capital for company can increase
companys earning available for stockholder, it will bring a new problem when the
company is unable to meet a payment obligation to the bank and this condition is
called financial distress. Financial distress is the condition where the company
facing difficulty to pay its debt or total liabilities is higher than total
assets(Handajani, 2013). If this happens to the company, it shows that company
fails to operate its operation efficiently and effectively and if it happens for
several years the company will experience the bankruptcy. Manager has to detect
the financial distress before the company facing the bankruptcy and from this
detection the manager is expected to take several actions to exempt the company
from financial distress. Besides the manager, detection of financial distress is
important to investors and creditors (Pasaribu,2008) because they have to consider
whether the company that they invested has capability to generate income. That is
why detecting financial distress is such an interesting thing because it is useful for
internal and external party.
There are lots of ways to detect financial distress condition in company.Macro
economy condition, rarely, appears a variable in detecting financial distress
(Sami,2014), but most of the research using financial statement of company as the
2

basis of calculation because it consists of lots of information that reflect

performance of the company(Pasaribu, 2008). (Al-Khatib & Al-Horani,
2012)wasused logistic regression and discriminant analysis model to assess 24
financial ratios which statistically significant in detecting financial distress.
(Pasaribu, 2008)wasused binary logit regression model and six early discriminator
to assess 34 financial ratios to detect financial distress. Chancarat, et all (2010)
used survival analysis technique to assess nine of financial ratios, market based
variable and company specific variables (company age, size and squared size) to
detect financial distress condition in company.
In other research Altman (1968) used discriminant analysis to develop Z
Score model to detect financial distress. The Z-score is a linear combination of
five common business ratios. The coefficients were estimated by identifying a set
of firms which had declared bankruptcy and then collecting a matched sample of
firms which had survived, with matching by industry and approximate size
(assets). This model can estimate the bankruptcy up to 2 years before the
bankruptcy happen.
In that research, Altman used five financial ratios as the variable to measure
the amount of Z score. These five financial ratios are chosen after following
several procedures. First Altman observe the significant of various alternative
function, after that evaluate the inter correlations between variables. The third is
Altman observe the accuracy of various profiles and the last procedure is Altman
judge the analysis (Altman, 1968). Those five ratios is kind like trusted ratio to
detect financial distress condition because those ratios are already follow several
3

procedures and by use these five ratio it will reduce time consuming rather that
use combination of lots of financial ratios.
First ratio is that Altman use in his research is Working Capital/Total Assets,
this ratio shows companys ability to generate working capital by using its total
assets thus if company has negative working capital, it means company run its
operation ineffectively and fail to meet its short-term liabilities by its short-term
assets .The second ratio is Retained Earning/Total Assets; this ratio shows
companys ability to generate retained earning by using its total assets. If the
company has no adequate retained earning, company will face higher probability
of fronting distress condition. The third ratio is Earning BeforeInterest and
Taxes/Total Assets; this ratio shows companys ability to generate earning before
interest and tax by using its total assets and if the company has negative number
of this ratio it means the company run the operation ineffectively. The fourth ratio
is Market Value Equity/Book Value of Total Liabilities; this ratio shows
companys ability to meets its obligation by using companys equity. If the market
value of equity less than its book value of total debt, company will face
difficulties to meet its obligation and will lead company to distress condition. The
fifth ratio is Sales/Total Assets shows companys ability to generate sales by using
its total assets. Sales become important because it is source of company to get
profit and it is used to pay companys liabilities. If company fails to generate
sales, it will lead the company to the distress condition.

1.2

Problem Identification

Financial Distress adalah kondisi dimana perusahaan tidak

dapat memenuhi kewajiban jangka panjangnya atau total utang
lebih besar daripada tota aset. Hal ini penting bagi manajemen
untuk mendeteksi financial distress sebelum financial distress itu
sendiri benar-benar terjadi pada perusahaan. Apabila perusahaan
mengalami financial distress, ini akan membawa perusahaan
pada kebangkrutan. Berdasarkan latar belakang diatas, Z-score
merupakan formula untuk memprediksi financial distress dengan
menggunakan beberapa rasio keuangan sebagai variabel untuk
mengukur jumlah Z score, rasio keuangannya adalah Working
Capital/Total Assets, Retained Earning/Total Assets, Earning Before Interest and
Taxes/Total Assets, Market Value Equity/Book Value of Total Liabilities and
Sales/Total Assets.
Berdasarkan fenomena diatas, muncullah beberapa pertanyaan
yang akan dibahas dalam penelitian ini. Beberapa pertanyaan
tersebut adalah:
1. Apakah rasio Working Capital/Total Assets dapat mendeteksi financial
distress pada perusahaan?
2. Apakah rasio Retained Earning/Total Assets dapat mendeteksi financial
distress pada perusahaan?
3. Apakah rasio Earning Before Interest and Taxes/Total Assets dapat
mendeteksi financial distress pada perusahaan?
4.

Financial Distress is the condition when the company unable to meet its
obligation or total debt is higher that total assets. It is important to management to
detect financial distress before this is really happening to the company. If the
company experiences financial distress, it will lead the company to the
bankruptcy. Based on the background above, Z score can predict financial
distress by using several financial ratios as the variable to measure the amount of
Z score, the ratios are Working Capital/Total Assets, Retained Earning/Total
Assets, Earning Before Interest and Taxes/Total Assets, Market Value
Equity/Book Value of Total Liabilities and Sales/Total Assets.
Based on phenomena above, arise several questions that would be answered in
this research. The questions are:
1. Can the Working Capital/Total Assets ratio detect financial distress of
company?
2. Can the Retained Earning/Total Assets ratio detect financial distress of
company?
3. Can theEarningBefore Interest and Taxes/Total Assets detect financial
distress of company?
4. Can the Market Value Equity/Book Value of Total Liabilities ratio detect
financial distress of company?
5. Can the Sales/Total Assets ratio detect financial distress of company?

1.3

Purpose of Study

Based on problem identification above, the purpose of this study are

1. To know the ability of Working Capital/Total Assets ratio to detect
financial distress of company?
2. To know the ability of Retained Earning/Total Assets ratio to detect
financial distress of company?

3. To know the ability of Earning Before Interest and Taxes/Total Assets to

detect financial distress of company?
4. To know the ability of Market Value Equity/Book Value of Total Liabilities
ratio to detect financial distress of company?
5. To know the ability of Sales/Total Assets ratio to detect financial distress
of company?

1.4

Benefit of study
The benefit of this study istoimprove knowledge and theory to detect financial

distress in company because this research using different sample and the period of
data rather than the previous research.(Hayes, Hodge, & Hughes, 2010)detect
financial distress by using Z score in retail companies with 2 consecutive years
(2007-2008). In this research, the writer detect financial distress condition by
using Z score in Non-Bank Financial Company with 5 consecutive year (20102014) thus the result will be different compare to previous research.

CHAPTER 2
THEORITICAL FRAMEWORK
2.1 Financial Distress
Internal and external party of company does financial statement analysis
because by doing this they could know the condition of the company whether it in
a good condition or vice versa. This is because financial statement provides
information about companys future prospect and what company has achieved for
all stakeholders.Financial statement analysis also could give prediction about
companys going concern. Predicting companys going concern is important
because it is concerning about financial distress condition and also related to
companys objective. If the company experience distress, it will lead company to
the bankruptcy.
Financial distress is the condition where the company facing difficulty to
pay its debt or total liabilities is higher than total assets (Handajani, 2013).In other
word, financial distress is defined as condition when operating profit could not
fulfill companys obligation that causes insolvency.
Pasaribu, 2008 explain several factors that cause financial distress in a
company. The first factor is companys ability to generate profit. If company is
unable to generate profit, company is facing higher risk to experience financial
distress. The second factor is companys debt. If company financing its operation
by using long-term debt and company fail to fulfill its obligation it will lead
company to financial distress condition. The third factor is companys age. This
8

factor is like a U curve, in the beginning period, company is having higher risk to
face financial distress, in mature age company is having lower risk to face
financial distress. The fourth factor is company size. This factor is also like a U
curve. The fifth factor is legal status. Limited ability of company is helping
company to avoid financial distress condition. The sixth factor is corporate
shareholder. By having lots of shareholder, it helps company to avoid financial
distress condition. The seventh factor is number of Creditor. Company with large
number of creditor is having higher risk to face financial distress condition rather
that company with single creditor. The eighth factor is diversification. Diversified
company is having higher risk to face financial condition rather than undiversified
company. The ninth factor is sector of industry could determine companys access
to get investor. The tenth factor is business cycle. If the company operates its
operation effectively and efficiently, it will reduce the risk of facing financial
distress condition.
Beside those ten factors that cause financial distress in a company, Platt &
Platt (2008:136) explain that a company is in financial distress if that company
meets these three criteria in two years in a row, the three criteria are: First is
negative EBITDA interest coverage, second is negative EBIT and third is negative
net income before special items.

2.2 Altman Z Score

Z score is a model developed by Edward I. Altman in 1968. Altman Zscore model classify condition of companies are based on the Z values obtained,
namely: If Z > 2.67, it show that company in good condition, if Z < 1.81, it show

that company in financial difficulties and if Z is between 1.81 to 2.67, then

including the gray area (can not be determined whether the company in a good
condition or in financial difficulties condition). In developing this model, Altman
was using multiple discriminant analysis as statistical technique to classify which
financial ratio that having high impact to detect financial distress condition in
company. Altman (1968:592) said that:
MDA is a statistical technique used to classify an observation into one of several
a prior; groupings dependent upon the observation's individual characteristics. It
is used primarily to classify and/or make predictions in problems where the
dependent variable appears in qualitative form, e.g., male or female, bankrupt or
non-bankrupt. Therefore, the first step is to establish explicit group classifications.
The number of original groups can be two or more.
Altman use multiple discriminant analysis because in the previous
researches financial ratios were examined separately thus the influence of
financial ratios to detect financial distress in company only based on researcher
consideration. By using multiple discriminant analysis Altman could consider
which ratio has higher influence to detect financial distress and what weight has to
be attached to the ratio. Multiple discriminant analysis was also success detect
another financial problem such as credit problem.
In developing this model, Altman using data from sixty-six companies and
divided them into two groups, group 1 is Bankruptcy Company that has average
of total assets for $6.4 Million, and group 2 is companies that still exist until 1966
and has average of total assets for $9.6 Million. All of these companies are
manufacturing company. For the data, Altman used financial statement of these
companies one year before it experience the bankruptcy. Altman used twenty-two

10

financial ratios that could help to detect financial distress condition and divided
them into five groups of ratios: liquidity, profitability, leverage, solvency and
activity ratio. These ratios were chosen based on their popularity and potential
relevancy to study.
After observing statistical significant, evaluating inter-correlation and
predictive accuracy of these twenty-two financial ratios, Altman were resulting the
final discriminant function, and it is as follows:
Z =0.012 X 1+ 0.014 X 2 +0.033 X 3 +0.006 X 4 +0.999 X 5

Where:
Z

Overall Index

X1

Working Capital / Total Asset

X2

Retained Earning / Total Assets

X3

Earning Before Interest and Taxes / Total Assets

X4

Market Value of Equity / Book Value of Total Debt

X5

Sales / Total Assets

These areexplanations of ratios that was used by Altman for calculating Z

score.
2.2.1 Working Capital / Total Assets.

This ratio shows companys ability to generate working capital by using its
total assets. If company has a negative amount of working capital, company has

11

higher probability to fail meets its obligation because there is no adequate shortterm assets available to pay short-term companys liabilities. This ratio is
measured by divided working capital with total assets. Working capital is
difference between current assets and current liabilities. Chancaratet all (2010)
have measured the influence of this ratio and show that it has positive influence to
financial distress.
2.2.2 Retained Earning / Total Assets
This ratio show companys ability to generate retained earning by using its
total assets. If the company has no adequate retained earning, company will face
higher probability of fronting distress condition. Retained earningis earning that
not distribute for stockholder and usually used forcompanys expansion. Age of
company has significant influent to this ratio. Young company probably has a
small amount of retained earning because they have not enough time to generate
retained earning. This ratio is measured by dividing companys retained earning
with total assets. Al-Khatib& Al-Horani (2012) argues that this ratio is one of
seven financial ratios that significantly influence to financial distress.
2.2.3 Earning Before Interest and Tax/ Total Assets
This ratio shows company ability to generate earning before interest and
tax by using its total assets and also show the true productivity of company. If
company has negative number of this ratio, it means company use it assets to
generate income ineffectively. This ratio measured by divided earning before
interest and tax with total assets. Al-Khatib& Al-Horani (2012) argue that earning

12

before interest and tax / total assets ratio is significantly influence to financial
distress.
2.2.4 Market Value of Equity / Book Value of Total Debt
This ratio shows companys ability to meets its obligation by using
companys equity. If the market value of equity less than its book value of total
debt, company will face difficulties to meet its obligation and will lead company
to distress condition. Equity is measured by calculate the market price times total
all of outstanding shares (common and preferred). Book value of total debt is
measured by adding companys current liabilities and long-term liabilities. This
ratio is more effective to detect financial distress condition rather that ratio that
commonly used in prior research, it is Net Worth / Total Debt. This ratio also
could show companys stability and solvability (Rahman,2014).
2.2.5 Sales / Total Assets
This ratio shows company ability to generate sales by using its total assets.
This ratio also shows managements efficiency in order to use companys assets to
generate sales. Sales / Total Assetsis important because this ratio is the most
significant ratio based on statistical measure conducted by Altman (1968) for its
unique relationship to other ratio in this model. Al-Khatib& Al-Horani (2012) also
argues that this ratio is one of seven financial ratios that significantly influence to
financial distress.

2.3 Research Framework

Table 2.1 Research Framework
N

Researcher

Title

Variable

Result

13

o
1

Edward
I. Financial Ratios, Discriminant Working
Altman (1968) Analysis and Prediction of Capital/Tot
Corporate Bankruptcy
al Asset,
Retained
Earning/To
tal Assets,
Earning
Before
Interest
and
Taxes/Tota
l Assets,
Market
Value of
Equity/Bo
ok Value
of
Total
Debt,
Sales/Total
Assets

Rashidah
The Use of CAMLES In Capital
Abdul Rahman Detecting Financial Distress of Adequacy,
(2014)
Islamic Bank In Malaysia
Asset

Discrimin
ant
analysis
used by
Altman is
resulting
formulatio
n
to
calculate
Z score.
This
Z
score
could be
used
to
predict
bankruptc
y. If Z >
2.67,
it
show that
company
in good
condition,
If Z <
1.81,
it
show that
company
in
financial
difficultie
s and If Z
is between
1.81
to
2.67, then
including
the gray
area
This
research
shows that

14

Quality,
Manageme
nt Quality,
Earning
Efficiency,
and
Liquidity.

all Islamic
banks
have low
possibility
to
face
financial
distress
condition.
They have
high ETA
ratios,
high ROE
ratio, high
ratios for
net loans /
deposits
& short
term
funding
and have
enough
liquid
assets to
cover
potential
loss.
Hazem B. Al- Predicting Financial Distress of Using 24 This
Khatib&Alaa
Public Companies Listed in financial
research
Al-Horani
Amman Stock Exchange
ratio:
used two
(2012)
Current
model to
ratio,
detect
current
financial
liabilities
distress,
to
total logistic
fixed
regression
assets,
and
current
discrimina
liabilities
nt
to equity, analysis.
working
Both of

15

capital to
equity,
logarithm
of
total
assets, etc.

NongnitChanch Multiple States of Financially Financial

arat
et
all Distressed Companies: Test Ratios
(2010)
using a Competing-Risk Model
(earnings
before
interest
and taxes
margin
(EBIT
margin),
return on
equity and
return on
assets;
current
ratio,
quick ratio
and
working
capital to
total assets
ratio ; debt
ratio and
capital
turnover
and total

this
models
could be
used
to
detect
financial
distress.
ROA and
ROE are
the most
important
ratios to
detect
financial
distress.
This
research
use
single-risk
model and
competing
-risk
model. In
both
models,
Debt
to
total
assets and
Size are
the most
significant
ratio
to
detect
financial
condition
and Age
of
company
has
no
significant

16

asset
turnover
),
stock
price,
companyspecific
variable of
age
and
size
Harlan D. Platt Financial Distress Comparison Profitabilit
& Marjorie B. Across Three Global Region
y
ratio,
Platt (2008)
leverage
ratio,
liquidity
ratio,
operating
efficiency
and
growth
ratio,
profit
margin
and cash
position.

to detect
financial
distress.

Single
global
model
could
detect
financial
distress
condition
in three
regions
because it
has
individual
financial
distress
model for
each
region.
Age and
efficiency,
unionizati
on,
benefit
payments
as
a
suppleme
nt to wage
levels and
etc.
become
factors

17

Rowland
Bismark
Fernando
Pasaribu
(2008)

Penggunaan Binary
LogitUntukPrediksi Financial
Distress Perusahaan Yang
Tercatat Di Bursa Efek Jakarta
(StudiKasusEmitenIndustriPerda
gangan)

that
causes
single
global
model
could not
use
in
three
global
regions.
Using 34
This
financial
research
ratios:
uses 6
Retained
indicators
earning to to detect
equity,
financial
long term
distress.
liabilities
First,
to total
company
assets,
which has
retained
negative
earning to EVA.
total
Second,
assets,
company
inventories which has
to sales,
assets turn
sales to
over for
total
40%.
assets, net Third,
income to company
total ssets, which has
etc.
current
ratio equal
to 50%.
Fourth,
company
with gross
profit
margin for
19%,

18

fifth,
company
which has
debt to
total
assets
equal to
66% and
sixth
company
which has
debt to
equity
ratio for
11.7%.
This
research
shows that
the first
and fourth
indicator
has
highest
ability to
detect
financial
distress.

2.4 Hypothesis Development

Based on theoretical framework and previous research about detecting
financial distress condition in company that already explained by writer, this
research try to develop hypothesis with formulation as follows:
2.4.1 The influence ofWorking Capital / Total Asset to Financial Distress
This ratio shows companys ability to generate working capital by using its
total assets. Chancaratet all (2010) show this ratio has positive influence to

19

financial distress. The more working capital generated by company will enhance
companys liquidity, it will reduce the risk of facing financial distress
(Chancaratet all, 2007).Based on this explanation, the hypothesis formulation as
follows:
H1

= Working Capital / Total Asset has positive influence to detect financial

distress
2.4.2 The influence of Retained Earning / Total Assets to Financial Distress
This ratio show companys ability to generate retained earning by using its
total assets. Al-Khatib& Al-Horani (2012)argues that this ratio is one of seven
financial ratios that significantly influence to financial distress. The higher
retained earning / total assets ratio that company could earn, the smallest
probability for company to face financial distress. Based on this explanation, the
hypothesis formulation as follows:
H 2 = Retained Earning / Total Assets has positive influence to detect financial
distress
2.4.3 The influence of Earning Before Interest and Taxes / Total Assets to
Financial Distress
This ratio shows company ability to generate earning before interest and
tax by using its total assets and also show the true productivity of company. AlKhatib& Al-Horani (2012) argue that earning before interest and tax / total assets
ratio is significantly influence to financial distress. If this ratio has positive
amount thus the company will not face financial distress. Based on this
explanation, the hypothesis formulation as follows:
20

H 3 = Earning Before Interest and Taxes / Total Assets has positive influence to
detect financial distress
2.4.4 The influence of Market Value of Equity / Book Value of Total Debt to
Financial Distress
This ratio shows companys ability to meets its obligation by using
companys equity. Equity is an important thing in order to maintain companys
stability and solvability (Rahman, 2014). This ratio has positive influence to
financial distress. Based on this explanation, the hypothesis formulation as
follows:
H 4 = Market Value of Equity / Book Value of Total Debt has positive influence
to detect financial distress
2.4.5 The influence of Sales / Total Assets to Financial Distress
This ratio shows company ability to generate sales by using its total assets.
Al-Khatib& Al-Horani (2012) said that this ratio is one of seven significant ratio
to financial distress. This ratio show assets turnover, if company has good assets
turnover it means company is efficient enough to generate sales by using its
assets. Based on this explanation, the hypothesis formulation as follows:
H 5 = Sales / Total Assets has positive influence to detect financial distress

21

CHAPTER 3
RESEARCH METHODOLOGY
3.1

Research Design

Based on theoretical explanation and previous research that detecting financial

distress by using various variables, this research using financial ratios Working

Capital / Total Asset (

H1

), Retained Earning / Total Assets (

Before Interest and Taxes / Total Assets (

Value of Total Debt (

X4

X3

X2

), Earning

), Market Value of Equity / Book

), Sales / Total Assets (

X5

). These five financial

ratios could be used to detect financial distress of a company. The ability of these
ratios to detect financial distress could be describes in the conceptual framework
as follows:
Picture 3.1
The Conceptual Framework
Independent variables
1.
2.
3.
Working
4. Capital / Total Asset
5.
6.
Retained Earning / Total Assets

Dependent variable

+
+
+

Earning Before Interest and Taxes / Total Assets

Financial Distress

+
+
Market Value of Equity / Book Value of Total Debt
22

Sales / Total Assets

3.1 Variable Operationalization

3.2

Variable Operationalization
There are two kinds of variable which was used in this research; those are

independent variable and dependent variable. Independent variable are ratios in

altman model such as working capital/total assets, retained earning/total assets,
earning before interest and tax/total assets, market value equity/book value of total
liabilities and sales/total assets. These independent variable affect dependent
variable, in this research dependent variable is financial distress. This table is
describe all variable in this research
Table 3.1
Variable Operationalization
Variable
Financial
Distress

Symbo
l
Z

Working
Capital/Tot
al Assets

X1

Retained
earning/tota
l assets

X2

Earning
before
interest and
tax/total
assets

X3

Concept

Measurement

Z
Score
show Z > 2.67 good condition
companys
financial 1.81< Z < 2.67 grey area
condition.
Z < 1.81 Financial Distress
This ratio shows
Net working Capital
companys ability to
Total Assets
generate working
capital by using its total
assets
This ratio shows
Retained Earning
companys ability to
Total Assets
generate retained
earning by using its
total assets
This ratio shows
EBIT
companys ability to
Total Assets
generate EBIT by using
its total assets

Scale
Nominal

Ratio

Ratio

Ratio

23

Market
value
of
equity/book
value
of
total debt
Sales/total
assets

3.3

X4

X5

This ratio shows

companys ability to
meets its obligation by
using companys equity
This ratio shows
companys ability to
generate sales by using
its total assets

Ratio
Market Valueof Equity
Book value of total debt

Ratio
Sales
Total Assets

Population and Sample

Population of this research is all companies listed in Indonesia stock

exchange. In this research, the method of collecting sample is Non Probability

Sampling Purposive Sampling. In purposive sampling method, the writer
enforces some limitation and purposes in collecting the sample.. The sample of
this research is Non-Bank Financial company listed in Jakarta Stock Exchange
from 2010 2014. The sample is collected from financial report which has been
published in official website of Indonesia Stock Exchange

3.4

Type and Source of Data

The data that used in this research is secondary data. The source of data that

will be processed in this research is financial report of Non-Bank Financial

Company from 2010 2014. In this research, the writer will focus on some
accounts in financial report of company, such as Sales, EarningBefore Interest and
Tax, Total Current Assets, Total Assets, Total Current Liabilities, Total Debt and
Retained Earning.

24

3.5

Data Collection Method

Data collection method that was used in this research is documentation. In

this method, the writer is reviewing and analyzing document that was published
by other party. The document was used is audited financial report of Non-Bank
Financial Company in period 2010 2014 which was downloaded from official
website of Indonesia Stock Exchange www.idx.co.id.

3.6

Data Analysis Method

In this research, the writer use three kinds of test to analyze the data which

was collected with method that already describe above. The three tests are statistic
description test, correlation test and regressionanalysis.
3.6.1

Descriptive Statistical Analysis

The writer uses this type of analysis to know the characteristic of the data

that already collected and also to know if the result of research could be
generalized or not. This type of analysis also could describe variables in this
research.
3.6.2

Determination of Z Score
To determent Z score, every single ratio is given discriminant function.

The final discriminant function to determent z score is originally as follows:

Z =0.012 X 1+ 0.014 X 2 +0.033 X 3 +0.006 X 4 +0.999 X 5
Where:
Z
=
X1 =

Overall Index
Working Capital / Total Asset

X2

Retained Earning / Total Assets

X3

Earning Before Interest and Taxes / Total Assets

25

X4

Market Value of Equity / Book Value of Total Debt

X5

Sales / Total Assets

But, Altman modified the model and resulting new discriminant function.
In this modification, Altman erase the fifth ratio, Sales/ Total Assets. This
abolition because this ratio is more significant for retail and services company
(Hayes, Hodge, & Hughes, 2010). The new final discriminant is as follow:
Z =6.56 X 1 +3.26 X 2 +6.72 X 3 +1.05 X 4
Where:
Z

Overall Index

Working Capital / Total Asset

X2

Retained Earning / Total Assets

X3

Earning Before Interest and Taxes / Total Assets

X4

Market Value of Equity / Book Value of Total Debt

X1

3.6.3

Correlation Test
The objective of this test is to know correlation between each variable and

to make sure that the data has been collected is not consist of random data. This
test also can show the influence of independent variables to the dependent
variable. In this research, the writer will implement Durbin Watson test. After
analyzing the data using Durbin Watson, the result will be on range of 0 to 4. If
the result is approaching 0 it means that the processed data is positive
autocorrelation and if the result is over 4 it means the data processed is negative
autocorrelation.

26

3.6.4

RegressionAnalysis
Regression analysis is mostly used to predicting and forecasting. In this

research, regression analysis is used to predicting the influence of independent

variable to the dependent variable.

27

References
Al-Khatib, H. B., & Al-Horani, A. (2012). Predicting Financial Distress of Public
Companies Listed in Amman Stock Exchange. European Scientific
Journal, 1-17.
Altman, E. I. (1968). FINANCIAL RATIOS, DISCRIMINANT ANALYSIS AND
THE PREDICTION OF CORPORATE BANKRUPTCY. The Journal of
Finance, Vol. 23, No. 4., 589-609.
Chancharat, N., Tian, G., Davi, P., McCrae, M., & Lodh, S. (2010). Multiple
States of Financially Distressed Companies: Test Using a Competing-Risk
Model. Australasian Accounting, Business and Finance Journal, Vol. 4,
Article 3, 1-37.
Chancharata, N., Davy, P., McCraec, M., & Tiand, g. (2007). Firms in financial
distress, a survival model analysis. 1-37.
Handajani, S. (2013). Pengaruh Kinerja Keuangan Terhadap Financial Distress
Pada Perusahaan Perbankan di BEI Pada Tahun 2008-2011. 1-4.
Hayes, S. K., Hodge, K. A., & Hughes, L. W. (2010). A Study of the Efficacy of
Altmans Z To Predict Bankruptcy of Specialty Retail Firms Doing
Business in Contemporary Times. Economics & Business Journal Volume
3 Number 1, 123-134.
Pasaribu, R. B. (2008). Pengaruh Binari Logit Untuk Prediksi FInancial Distress
Perusahaan Yang Tercatat Di Bursa Efek Jakarta (Studi Kasus Emiten
Industri Perdagangan). Jurnal Ekonomi, Bisnis dan Akuntansi Ventura,
Vol. 11, No. 2, 153-172.
Platt, H. D., & Platt, M. B. (2008). Financial DISTRESS COMPARISON
ACROSS THREE GLOBAL REGIONS. JOURNAL OF RISK AND
FINANCIAL MANAGEMENT, 129-162.
Rahman, R. A. (2014). The Use Of CAMELS In Detecting Financial Distress
Of Islamic Banks In Malaysia. The Journal of Applied Business Research
March/April 2014 Volume 30, Number 2, 445-452.

28

29

Appendix
The Use Of CAMELS In Detecting
Financial Distress Of Islamic
Banks In Malaysia
Rashidah Abdul Rahman, Accounting Research Institute, UniversitiTeknologi
MARA, Malaysia
MazniYantiMasngut, UniversitiTeknologi MARA, Malaysia
ABSTRACT
The current study uses CAMEL (Capital Adequacy, Asset Quality, Management
Quality, Earnings
Efficiency, and Liquidity) ratings system, with the addition of Shariah
Compliance Ratio (CAMELS) in order to detect the financial distress of Islamic
banks in Malaysia. Using neural network, the study analyses data collected from
the 17 Islamic banks annual reports for the period 2006 to 2010. It was found that
all Islamic banks have higher ETA ratios which portray a good performance of
capital adequacy and are less likely to face financial distress. As for asset quality,
all Islamic banks did not have the possibility to face financial distress as they are
able to handle their non-performing loans throughout the years. Meanwhile for
management quality, all Islamic banks show lower ratios in paying salaries to their
employee. Earning efficiency for all Islamic banks show better performance and
will be less likely to face financial distress in terms of return on assets but not for
return of equity. Liquidity indicates that the Islamic banks have a large number of
loans but they have sufficient liquid assets in order to cover their liabilities and
commitments. Lastly for Shariah Compliance, Islamic banks have complied with
all rules and regulations that have been regulated by Bank Negara Malaysias
Shariah Advisory Council.

Keywords: Financial Distress; Financial Detection; Islamic Financial Institutions

30

PREDICTING FINANCIAL DISTRESS OF PUBLIC COMPANIES

LISTED IN AMMAN STOCK EXCHANGE
HazemB . Al-khatib
Associate Professor Amman University, Department of Finance and Banking
Alaa Al-Horani
Associate Professor at Amman University, Department of Finance and Banking
Abstract
This study investigates the role of a set of financial ratios in predicting financial
distress of publicly listed companies in Jordan. Using Logistic Regression and
Discriminant Analysis a comparison has been made between the two models to
determine which is more appropriate to use as well as which of the financial ratios
are statistically significant in predicting the financial distress of Jordanian
companies. During the period 2007 to 2011, the results show that both logistic
regression and discriminant analysis can predict financial distress, and that Return
on Equity (ROE) and Return on Assets (ROA) are the most important two
financial ratios, which help in predicting the financial distress of public companies
listed in Amman stock Exchange.
Keywords: Financial Distress, Public Companies, Stock Exchange

31

PENGARUH KINERJA KEUANGAN TERHADAP FINANCIAL DISTRESS

PADA
PERUSAHAAN PERBANKAN DI BEI PADA TAHUN 2008-2011
SUSANA HANDAJANI
E-mail: susana.handayani91@gmail.com
ABSTRAK
The company's main objective is to increase corporate value through improved
financial performance of the company, so the company will have a good condition
or not bankruptcy. This study aims to examine the effect of financial distress on
the financial performance of the banking company. This study uses secondary
data from 30 banking companies listed in Indonesia Stock Exchange during the
four years of the period 2008-2011 as the sample and have to meet certain
criteria. The results indicate that financial distress affects financial performance.
Only earnings
per share are not significantly detrimental to financial distress.
Key words: Corporate Value, Financial Distress, Bankcrupcty, and Risk Adjusted
Return On Capital.

32

Multiple States of Financially Distressed Companies : Tests using a

Competing-Risks Model
Abstract
This study examines the determinants of multiple states of financial distress by
applying a competing-risks model. It investigates the effect of financial ratios,
market-based variables and company-specific variables, including company age,
size and squared size on three different states of corporate financial distress:
active companies; distressed external administration companies; and distressed
takeover, merger or acquisition companies. A sample of 1,081 publicly listed
Australian non-financial companies over the period 1989 to 2005 using a
competing-risks model is used to determine the possible differences in the factors
of entering various states of financial distress. It is found that specifically,
distressed external administration companies have a higher leverage, lower past
excess returns and a larger size; while distressed takeover, merger or acquisition
companies have a lower leverage, a higher capital utilisation efficiency and a
larger size compared to active companies. Comparing the results from both the
single-risk model and the competing-risks model reveals the need to distinguish
between financial distress states.
Keywords
era2015

33

Firms in financial distress, a survival model analysis

NongnitChancharata, Pamela Davy b, Michael McCraec and Gary
Tiand*
a, b and d - School of Accounting and Finance, University of
Wollongong
c - School of Mathematics and Applied Statistics, University of
Wollongong
ABSTRACT
The paper aims to a) identify the probability of corporate survival in a given time
frame based on the state of the financial health of a company and b) investigate
the effect of financial ratios, market based variables and company specific
variables (including company age, size and squared size) on corporate financial
distress. A sample of 1,117 publicly listed Australian companies was examined
over the period 1989 to 2005 using a survival analysis technique in Cox
proportional hazards form. The results support the usefulness of financial ratios,
market based variables and company size as predictors of financial distress.
Financially distressed companies have lower profitability, higher leverage, lower
past excess returns and larger size compared to active companies. However,
company age lack significance in explaining financial distress.
KEYWORDS: Financial Distress, Survival Analysis, Cox Proportional Hazards
Model

34

PENGGUNAAN BINARY LOGIT UNTUK PREDIKSI

FINANCIAL DISTRESS PERUSAHAAN YANG TERCATAT
DI BURSA EFEK JAKARTA
(StudiKasusEmitenIndustriPerdagangan))
Rowland Bismark Fernando Pasaribu
ABFI INSTITUTE PERBANAS JAKARTA
(rowland.pasaribu@gmail.com)
ABSTRACT
This study attempts to form prediction of financial distress prediction at go public
companies listed in the Jakarta Stock Exchange. Specifically, those which are
involved in the trade industries. The samples used in research are all public
companies incorporated in the trading industry 2002-2006 period. The research
used six early discriminator and 34 financial ratios as an operational variable.
The analysis technique used is a binary logit regression. The results shows that 18
financial ratios are considered as significant. This also shows that which do not
create economic value-added, illiquid, low operational efficiency and low rate of
financial leverage are supposed to have high difficulty of probability. The degree
of accuracy towards the model produced lies between 76.28% -98.08%.
Keywords: financial distress, financial ratios, binary logit.

35

FINANCIAL DISTRESS COMPARISON

ACROSS THREE GLOBAL REGIONS
Harlan D. Platt
Northeastern University
Marjorie B. Platt
Northeastern University
ABSTRACT
Globalization has precipitated movement of output and employment between
regions. We examine factors related to corporate financial distress across three
continents. Using an ultidimensional definition of financial distress we test three
hypotheses to explain financial distress using historical financial data. A null
hypothesis of a single global model was rejected in favor of a fully relaxed model
which created individual financial distress models for each region. This result
suggests that despite other indications of worldwide convergence, international
differences in accounting rules, lending practices, managements skill levels, and
legal requirements among others has kept corporate decline from becoming
commoditized.

36

A Study of the Efficacy of Altmans Z To Predict

Bankruptcy of Specialty Retail Firms Doing Business in
Contemporary Times

Suzanne K. Hayes
University of Nebraska at Kearney
Kay A. Hodge
University of Nebraska at Kearney
Larry W. Hughes
Central Washington University
Authors are listed in alphabetical order.
Abstract: Altmans Z, a multiple discriminant analysis bankruptcy model using
commonly accepted cutoff criteria, may provide a useful decision rule to predict
financial distress in firms operating in a wide variety of industries. In this study,
we outline the construction and interpretation of the Z-Score and apply it to
several pairs of firms (N=17) from a variety of specialty retail industries spanning
two consecutive years. Past research indicates that Altmans Z predicted future
financial distress in 90 percent of the firms studied. In this study, all but two of the
bankruptcies (94 percent) would have been accurately predicted. Despite some
criticism of the models efficacy, two firms were misclassified yet later revealed
potential financial distress.
Keywords: Altmans Z, financial distress, bankruptcy, performance, strategy

37

Financial Ratios, Discriminant Analysis and the

Prediction of Corporate Bankruptcy
Edward I. Altman
The Journal of Finance, Vol. 23, No. 4.(Sep., 1968), pp. 589-609.
ACADEMICIANS seem to be moving toward the elimination of ratio analysis as
an analytical technique in assessing the performance of the business enterprise.
Theorists downgrade arbitrary rules of thumb, such as company ratio
comparisons, widely used by practitioners. Since attacks on the relevance of ratio
analysis emanate from many esteemed members of the scholarly world, does this
mean that ratio analysis is limited to the world of "nuts and bolts"? Or, has the
significance of such an approach been unattractively garbed and therefore unfairly
handicapped? Can we bridge the gap, rather than sever the link, between
traditional ratio "analysis" and the more rigorous statistical techniques which have
become popular among academicians in recent years? The purpose of this paper is
to attempt an assessment of this issue-the quality of ratio analysis as an analytical
technique. The prediction of corporate bankruptcy is used as an illustrative
case.lSpecifically, a set of financial and economic ratios will be investigated in a
bankruptcy prediction context wherein a multiple discriminant statistical
methodology is employed. The data used in the study are limited to manufacturing
corporations. A brief review of the development of traditional ratio analysis as a
technique for investigating corporate performance is presented in section I. In
section I1 the shortcomings of this approach are discussed and multiple
discriminant analysis is introduced with the emphasis centering on its
compatibility with ratio analysis in a bankruptcy prediction context. The
discriminant model is developed in section 111,where an initial sample of sixtysix firms is utilized to establish a function which best discriminates between
companies in two mutually exclusive groups: bankrupt and non-bankrupt firms.
Section IV reviews empirical results obtained from the initial sample and several
secondary samples, the latter being selected to examine the reliability of the
discriminant model as a predictive technique. In section V the model's adaptability
to practical decision-making situations and its potential benefits in a variety of
situations are suggested. The final section summarizes the findings and
conclusions of the study, and assesses the role and significance of traditional ratio
analysis within a modern analytical context.

38