ANALYSIS OF THE EFFECT OF LEVERAGE, SALES

GROWTH AND LIQUIDITY ON PROFITABILITY

AND FINANCIAL DISTRESS

Ardyas Yoga Yudhana1, Mahameru Rosy Rochmatullah2

1
Accounting / Muhammadiyah University of Surakarta, ardysyg961@gmail.com
2
Accounting / Muhammadiyah University of Surakarta, mrn122@ums.ac.id

Article Info Abstract

Accepted XXX, 20XX This study aims to determine whether leverage, sales
growth, and liquidity have succeeded in increasing
Revised XXX, 20XX profitability and also reducing company's financial
distress. The population used in this study are
Published XXX, 20XX
manufacturing companies listed on the Indonesia Stock
Exchange (IDX) for 2019-2021. The sample selection
was carried out using a purposive sampling method, with
Keywords: a final sample size of 73 manufacturing companies
during the 2019-2021 research period. This study uses
profitability, financial distress, multiple linear regression analysis with IBM SPSS
leverage, sales growth, version 25. The results of this study indicate that
liquidity leverage has a significant negative effect on profitability
and a significant positive effect on financial distress.
Sales growth shows that it has no significant effect on
profitability or financial distress. Liquidity shows no
significant effect on profitability, but has a significant
effect on financial distress.

INTRODUCTION
The world economy, which has improved after the global crisis, has had a
positive impact on Indonesian investment, resulting in an unavoidable tight
competition in the business world. One of the efforts to achieve company goals is
to get profit. Company profits or profits are needed for the benefit of the company's
life. To obtain this profit, the company must carry out operational activities (Sunarto
and Budi, 2009). According to Nafarin (2007:788) profit is the difference between
income and the balance of costs and expenses for a certain period. It can be
concluded that profit is an excess of income that is acceptable to the company
concerned after making sacrifices for other parties. However, in reality not all
companies can realize this because there are still many companies that have
experienced bankruptcy as a result of financial distress problems that cannot be
handled properly.
In carrying out its operational activities a company must be directed at
achieving the goals that have been set. The main goal of the company according to
(Horne and Whacowizc, 2013) is to maximize the welfare of its shareholders or the
owners of the company (stakeholders). One way to maximize the welfare of
company owners is to maximize the profits they get. The level of profit earned by
the company is related to the level of company profitability. According to R. Agus
Sartono (2010: 122): Profitability is the company's ability to earn profits in relation
to sales, total assets and own capital. Profitability is very important for companies
because it can reflect the success and survival of a company.
Financial distressis a condition where the company faces financial
difficulties. Financial distress has a close relationship with bankruptcy in a company
because financial distress is a stage where the company's financial condition
decreases before bankruptcy occurs. The cause of the company's inability to
maintain its business continuity is economic failure and financial failure. Economic
failure can be caused by an imbalance between income and expenses or the
company's cost of capital that is greater than the level of profit or the historical cost
of investment. Meanwhile, financial failure is caused by the company being unable
to pay its obligations at maturity even though the total assets exceed the total
liabilities.
Leverage is the use of assets and sources of funds by companies that have
fixed costs (fixed expenses) with the intention of increasing the potential profits of
shareholders (Sartono, 2010: 123). The use of debt in the company's funding
activities not only has a good impact on the company. If the proportion of leverage
is not taken into account by the company, it will cause a decrease in profitability
because the use of debt creates a fixed interest expense. Kriscahyadi (2011), said
that with the increasing debt to equity ratio (DER) where the debt burden is also
getting bigger, this has an impact on the profitability of the company, because some
of it is used to pay loan interest. The greater the interest costs, the lower the
profitability (earnings after tax). then the rights of shareholders (dividends) are also
decreasing. The use of debt that is too high will cause a decrease in dividends in
which most of the profits will be allocated as reserves for debt repayment which
will later cause financial distress.
Sales are an important criterion for assessing company profitability and are
the main indicator of company activity (Andrayani, 2013). Sales growth is an
increase in the number of sales from year to year or from time to time (Kennedy et
al., 2013). Sales growth has a strategic influence on the company because sales
growth is marked by an increase in market share which will have an impact on
increasing sales from the company so that it will increase the profitability of the
company (Pagano and Schivardi, 2003). Research conducted by Eliu (2014) shows
that the higher the sales growth ratio of a company, the less likely the company is
to experience financial distress.
Most companies experience highly unstable liquidity with very scarce cash
flow due to tight credit market conditions and decreased demand (Enqvist et al.,
2014). According to Kasmir (2012: 129) when the amount of current assets is too
small it will cause illiquidity, whereas if the amount of current assets is too large it
will result in the emergence of idle cash (idle funds), all of this affects the company's
operations. In addition to these problems the company is also faced with the
problem of determining the source of funds. Liquidity has a close relationship with
profitability, because liquidity shows the level of availability of working capital
needed in operational activities. The liquidity ratio can be used to predict the
occurrence of financial distress. Liquidity shows the ability of an entity to cover the
company's current liabilities by utilizing its current assets. A company can be said
to be liquid if the company can complete its short-term obligations when they fall
due, but if the company cannot settle its short-term obligations when they fall due,
then the company is said to be illiquid or illiquid.
This research was carried out at manufacturing companies listed on the IDX
in 2019-2021. According to Setiawan (2011) in Agusti (2013), the manufacturing
sector was chosen because this sector makes a relatively large contribution to the
economy in the export sector. From the problems that have been discussed, this
study aims to find out whether leverage has succeeded in increasing profitability
and also reducing company financial distress, to find out whether sales growth has
succeeded in increasing profitability and also reducing company financial distress
and to find out whether liquidity has succeeded in increasing profitability and also
reducing company financial distress. Leverage, sales growth, and liquidity in this
study are used to predict profitability and financial distress.
RESEARCH METHODS
According to Nugraha (2017), data is a collection of information or values
obtained from observing an object, data can be in the form of numbers and can also
be in the form of symbols or features. In this study, the data used is secondary data.
Data collection techniques in this study were carried out using quantitative
methods, where the data used is expressed in numbers and the results of calculations
and measurements.
This research was conducted at manufacturing companies listed on the IDX
in 2019-2021 using purposive sampling for sampling. The sample criteria used are;
1) Manufacturing companies listed on the IDX during the 2019-2021 period. 2)
Manufacturing companies that publish annual financial reports for the 2019-2021
period consecutively on the IDX. 3) Manufacturing companies that experienced
profits in the 2019-2021 period in a row. The application of this method resulted in
73 manufacturing companies that met the criteria for three years of observation.
The data used in this research is secondary data in the form of documentation and
literature studies. And the data obtained indirectly from the company concerned
which is the object of research, www.idx.co.id.
The independent variables used in this research are leverage, sales growth,
and liquidity. The independent variable empirical indicators in this study are
leverage proxied by the debt to equity ratio (DER), sales growth is proxied by the
sales growth ratio, and liquidity is proxied by the current ratio. While the dependent
variable used in this study is profitability and financial distress. The empirical
indicator of the dependent variable in this study is profitability proxied by return on
assets (ROA), and financial distress is proxied by using the Zmijewski model.
RESULTS AND DISCUSSION
Descriptive Statistical Analysis
Table 1. Statistical Descriptive (Y1)
Variable N Minimum Maximum Means std.
Deviation
ROA 214 0.00 0.42 0.0664 0.06312
LEV 214 0.00 10,28 0.9396 1.01219
SALE 214 -0.96 1.27 0.0660 0.23462
LQ 214 0.60 312.79 6.5361 32.60460
Source: Secondary data processed by the author, 2023
The amount of final research data that was used as a sample was 214 of the
initial research data amount of 219. There were 5 data outliers. Based on the table,
the average value (mean) of the profitability variable is 0.0664 with a standard
deviation of 0.06312, while the minimum value is 0.00 and the maximum value is
0.42. The average value (mean) of the leverage variable is 0.9396 with a standard
deviation of 1.01219, while the minimum value is 0.00 and the maximum value is
10.28. The average (mean) value of the sales growth variable is 0.0660 with a
standard deviation of 0.23462, while the minimum value is -0.96 and the maximum
value is 1.27. The mean value of the liquidity variable is 6.5361 with a standard
deviation of 32.60460, while the minimum value is 0.60 and the maximum value is
312.79.
Table 2. Statistical Descriptive (Y2)
Variable N Minimum Maximum Means std.
Deviation
 FD 184 -5.62 -0.40 -2.2786 1.04986
LEV 184 0.00 2.44 0.8208 0.53655
SALE 184 -0.55 0.85 0.0686 0.20622
LQ 184 0.60 312.79 4.3266 23.00692
Source: Secondary data processed by the author, 2023
The final research data sample was 184 out of the initial 219 research data.
There were 35 data outliers. Based on the table, the mean value of the financial
distress variable is -2.2786 with a standard deviation of 1.04986, while the
minimum value is -5.62 and the maximum value is -0.40. The average value (mean)
of the leverage variable is 0.8208 with a standard deviation of 0.53655, while the
minimum value is 0.00 and the maximum value is 2.44. The average (mean) value
of the sales growth variable is 0.0686 with a standard deviation of 0.20622, while
the minimum value is -0.55 and the maximum value is 0.85. The mean value of the
liquidity variable is 4.3266 with a standard deviation of 23.00692, while the
minimum value is 0.60 and the maximum value is 312.79.
Normality test
The statistical test used to test normality in this study is the Central Limit Theorem
(CLT) test, namely if the number of observations (N) is greater than 30 (N>30),
then the assumption of normality can be ignored (Gujarati, 2003). The results of the
normality test in this study indicate that the number of observations (N) for the
profitability variable (Y1) is 214 samples, so it can be interpreted that the number
of samples 214 is greater than 30. The number of observations (N) for the financial
distress variable (Y2) is 184 samples, so that it can be interpreted that the number
of samples of 184 is greater than 30. This shows that the data can be said to be
normally distributed and can be called a large sample.
Multicollinearity Test
Table 3. Multicollinearity test results (Y1)
Variable Tolerance VIF Information
LEV 0.982 1.018 There is no Multicollinearity
SALE 0.969 1.032 There is no Multicollinearity
LQ 0.952 1,050 There is no Multicollinearity
Source: Secondary data processed by the author, 2023
Based on the table, it illustrates that the tolerance value of each variable is
greater than 0.1 and the VIF value is less than 10, so it can be concluded that all
variables have no multicollinearity problem.
 Table 4. Multicollinearity test results (Y2)
Variable Tolerance VIF Information
LEV 0.971 1,030 There is no Multicollinearity
SALE 0.993 1.007 There is no Multicollinearity
LQ 0.965 1.036 There is no Multicollinearity
Source: Secondary data processed by the author, 2023
Based on the table, it illustrates that the tolerance value of each variable is
greater than 0.1 and the VIF value is less than 10, so it can be concluded that all
variables have no multicollinearity problem.
Autocorrelation Test
Table 5. Autocorrelation test results (Y1)
Adjusted Rstd. Error of theDurbin-
Model R R Square
Square Estimate Watson
1 0.259a 0.067 0.054 0.06139 1,870
Source: Secondary data processed by the author, 2023
Based on the table, it can be seen that the DW value is 1.870 and is between
-2 and +2, so it can be concluded that there is no autocorrelation.
Table 6. Autocorrelation test results (Y2)
Adjusted Rstd. Error of theDurbin-
Model R R Square
Square Estimate Watson
1 0.943a 0.890 0.888 0.35112 1,985
Source: Secondary data processed by the author, 2023
Based on the table, it can be seen that the DW value is 1.985 and is between
-2 and +2, so it can be concluded that there is no autocorrelation.
Heteroscedasticity Test
Table 7. Heteroscedasticity test results (Y1)
Variable Sig. Critical Information
Value
LEV 0.799 0.05 There is no Heteroscedasticity
SALE 0.849 0.05 There is no Heteroscedasticity
 LQ 0.234 0.05 There is no Heteroscedasticity
Source: Secondary data processed by the author, 2023
Based on the results of the heteroscedasticity test using the Glejser test
above, it can be seen that the probability significance value of each variable is
0.799, 0.849, and 0.234 which is greater than 0.05, so it can be concluded that all
variables do not have heteroscedasticity.
Table 8. Heteroscedasticity test results (Y2)
Variable Sig. Critical Information
Value
LEV 0.328 0.05 There is no Heteroscedasticity
SALE 0.749 0.05 There is no Heteroscedasticity
LQ 0.986 0.05 There is no Heteroscedasticity
Source: Secondary data processed by the author, 2023
Based on the results of the heteroscedasticity test using the Glejser test
above, it can be seen that the probability significance value of each variable is
0.328, 0.749 and 0.986 which is greater than 0.05, so it can be concluded that all
variables do not occur heteroscedasticity.
Multiple Linear Regression Analysis
Table 9. Multiple linear regression results (Y1)
Unstandardized Standardized
Coefficients Coefficients Q Sig.
Model B std. Error Betas
1 (Constant) 0.080 0.006 13,187 0.000
LEV -0.014 0.004 -0.232 -3,446 0.001
SALE 0.023 0.018 0.085 1.256 0.211
LQ 0.000 0.000 -0.104 -1.519 0.130
Source: Secondary data processed by the author, 2023
Based on the table, the following equation can be arranged:
ROA = 0.080 – 0.014 LEV + 0.023 SALE + 0.000 LQ + ε
Information:
ROA = Profitability
LEV = Leverage
SALE = Sales Growth
LQ = Liquidity
ε = error
Based on the regression equation, it can be interpreted as follows:
1) A constant of +0.080 indicates that leverage, sales growth and liquidity are
assumed to be constant or equal to 0, so the profitability value is +0.080.
2) The regression coefficient on the leverage variable shows a value of -0.014.
This shows that when leverage increases, profitability will decrease.
Conversely, if leverage decreases, profitability will increase.
3) The regression coefficient on the sales growth variable shows a value of
+0.023. This shows that when sales growth increases, profitability will
increase. Conversely, if sales growth decreases, then profitability will
decrease.
4) The regression coefficient on the liquidity variable shows a value of +0.000.
This shows that when liquidity increases, profitability will remain the same.
Vice versa if liquidity decreases, then profitability will also be fixed.

Table 10. Multiple linear regression results (Y2)

Unstandardized Standardized
Coefficients Coefficients Q Sig.
Model B std. Error Betas
1 (Constant) -3,699 0.050 -74,571 0.000
LEV 1,774 0.049 0.907 36,138 0.000
SALE -0.093 0.126 -0.018 -0.734 0.464
LQ -0.007 0.001 -0.147 -5,830 0.000
Source: Secondary data processed by the author, 2023
Based on the table, the following equation can be arranged:
FD = -3.699 + 1.774 LEV - 0.093 SALE - 0.007 LQ + ε
Information:
FD = Financial Distress
LEV = Leverage
SALE = Sales Growth
LQ = Liquidity
ε = error
Based on the regression equation, it can be interpreted as follows:
1) A constant of -3.669 indicates that leverage, sales growth and liquidity are
assumed to be constant or equal to 0, so the value of financial distress is -
3.669.
2) The regression coefficient on the leverage variable shows a value of +1.774.
This shows that if leverage increases, financial distress will increase.
Conversely, if leverage decreases, financial distress will decrease.
3) The regression coefficient on the sales growth variable shows a value of -
0.093. This shows that if sales growth increases, financial distress will
decrease. Conversely, if sales growth decreases, financial distress will
increase.
4) The regression coefficient on the liquidity variable shows a value of -0.007.
This shows that if liquidity increases, financial distress will decrease.
Conversely, if liquidity decreases, financial distress will increase.

Statistical Test F
Table 11. Statistical test results f (Y1)
Model Sum of Squares df MeanSquare F Sig.
1 Regression 0.057 3 0.019 5,050 0.002b
residual 0.791 210 0.004
Total 0.849 213
Source: Secondary data processed by the author, 2023
Based on the table, it shows a probability value of 0.002, which means it is
smaller than the significance level α = 0.05, so it can be concluded that all
independent variables simultaneously affect the dependent variable. This also
shows that the regression model used is goodness of fit.
Table 12. Statistical test results f (Y2)
Model Sum of Squares df MeanSquare F Sig.
1 Regression 179,511 3 59,837 485,351 0.000b
residual 22,191 180 0.123
Total 201,703 183
Source: Secondary data processed by the author, 2023
Based on the table, it shows a probability value of 0.000, which means it is
smaller than the significance level α = 0.05, so it can be concluded that all
independent variables simultaneously affect the dependent variable. This also
shows that the regression model used is goodness of fit.
Determination Coefficient Test (R2)
Table 13. Coefficient of determination test results (Y1)
Model R R Square Adjusted R Square std. Error of the Estimate
1 0.259a 0.067 0.054 0.06139
Source: Secondary data processed by the author, 2023
Based on the table shows the value of the coefficient of determination with
adjusted R2 of 0.054. This means that 5.4% of the variation in the profitability
variable can be explained by the leverage, sales growth, and liquidity variables. The
remaining 94.6% is explained by other factors outside the model studied.
Table 14. Coefficient of determination test results (Y2)
Model R R Square Adjusted R Square std. Error of the Estimate
1 0.943a 0.890 0.888 0.35112
Source: Secondary data processed by the author, 2023
Based on the table shows the value of the coefficient of determination with
adjusted R2 of 0.888. This means that 88.8% of the variation in the financial distress
variable can be explained by the leverage, sales growth and liquidity variables. The
remaining 11.2% is explained by other factors outside the model studied.
Statistical Test t
Table 15. Statistical test results t (Y1)
Variable tcount ttable Sig. std. Sig. Information
LEV 1,971 -3,446 0.001 0.05 Significant
SALE 1,971 1.256 0.211 0.05 Not significant
LQ 1,971 -1.519 0.130 0.05 Not significant
Source: Secondary data processed by the author, 2023
Based on the table it can be explained as follows:
1) The leverage variable is known to have a significance value of 0.001 which
is less than α = 0.05, so it can be concluded that leverage has a significant
effect on profitability.
2) The sales growth variable is known to have a significance value of 0.211
greater than α = 0.05, so it can be concluded that sales growth has no
significant effect on profitability.
3) The liquidity variable is known to have a significance value of 0.130 greater
than α = 0.05, so it can be concluded that liquidity has no significant effect
on profitability.
Table 16. Statistical test results t (Y2)
Variable tcount ttable Sig. std. Sig. Information
LEV 1,973 36,138 0.000 0.05 Significant
SALE 1,973 -0.734 0.464 0.05 Not significant
LQ 1,973 -5,830 0.000 0.05 Significant
Source: Secondary data processed by the author, 2023
Based on the table it can be explained as follows:
1) The leverage variable is known to have a significance value of 0.000 which
is less than α = 0.05, so it can be concluded that leverage has a significant
effect on financial distress.
2) The sales growth variable is known to have a significance value of 0.464
greater than α = 0.05, so it can be concluded that sales growth has no
significant effect on financial distress.
3) The liquidity variable is known to have a significance value of 0.000 less
than α = 0.05, so it can be concluded that liquidity has a significant effect
on financial distress.
CONCLUSIONS AND RECOMMENDATIONS
This study examines the analysis of the effect of leverage, sales growth and
liquidity on profitability and financial distress. Companies included in this
population are manufacturing companies listed on the Indonesia Stock Exchange
(IDX) 2019-2021. The total population is 73 companies and obtained a sample for
profitability of 214 from the initial number of 219, because there are 5 data outliers.
While the sample for financial distress was 184 out of a total sample of 219, because
there were 35 data outliers. The analysis in this study uses a multiple linear
regression model.
Based on the data collected, the results of the tests that have been carried
out and the previous discussion, it can be concluded that leverage as measured using
the debt to equity ratio has a significant negative effect on profitability as measured
by return on assets. The same results were also found in research conducted by
Rosyadah et al., (2013). Meanwhile, leverage as measured using the debt to equity
ratio has a significant positive effect on financial distress as measured by the X-
Score. The same results were also found in research conducted by Suryani (2020).
So it can be concluded that leverage in this study actually increases profitability and
also increases the company's financial distress.
Sales growthmeasured using the sales growth ratio has no significant effect
on profitability as measured by return on assets. The same results were also found
in research conducted by Sunarto and Budi (2009). And sales growth as measured
using the sales growth ratio also does not have a significant effect on financial
distress as measured by the X-Score. The same results were also found in research
conducted by Suryani (2020). So it can be concluded that sales growth in this study
did not affect the company's profitability or financial distress.
Liquidity as measured using the current ratio has no significant effect on
profitability as measured by return on assets. The same results were also found in
research conducted by Yuliati (2013) and Manurung (2012). Meanwhile, liquidity
as measured using the current ratio has a significant negative effect on financial
distress as measured by the X-Score. The same results were also found in research
conducted by Almilia and Kristijadi (2003), Jiming & Weiwei (2011),
Triwahyuningtias (2012), and Atika, et al (2013). So it can be concluded that
liquidity in this study has no effect on profitability and also increases the company's
financial distress.
Future researchers are expected to use independent variables outside of
financial ratios such as audit committees, independent commissioners, and public
ownership. Researchers also suggest that future studies add or use other
measurements to proximate profitability with return on equity. And using other
measurements to proxy for financial distress such as the Altman Z-Score, Springate
and Grover methods. To be able to recover the company from financial distress, the
company's management needs to carry out a restructuring in the form of selling the
company's assets. In addition, management can also reduce production levels to
reduce costs incurred.
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