Financial Distress Prediction Through Cash Flow Ratios Analysis

Abstract

The purpose of this study to examine the relationship of cash flow ratios in predicting financial distress companies, with industrial and consumer product companies in Bursa Malaysia as the sample. The study on financial distress is critical as it can lead to bankruptcy, which may adversely affect the economy of the country. Therefore it is worth exploring any indicators that can identify the possibility of financial distress in the company. The tools enable to address the potential problems that can mitigate from distressed financial position.  Most prior studies in Malaysia focus on traditional financial ratios, while this study exploits the strength of cash flow ratios. The liquidity ratio, solvency ratio, efficiency ratio and profitability ratio utilized in this study are derived from the statement of cash flows. The Altman Z-score is used to measure the level of the financial distress. The findings show mixed relationships between solvency ratio and financial distress and a negative significant relationship between profitability ratio and financial distress, whilst efficiency ratio has no relationship with the financial distress. These results suggest that cash flow ratios are reliable tools to predict financial distress for Malaysian context. The study is useful in giving insights to the stakeholders in their decision making.