Citation:

Md. Rasel Uddin, Joyanta Das, Mahamudul Hasan. "The Role of Financial Ratios in Signaling Financial Distress" International Research Journal of Economics and Management Studies, Vol. 3, No. 1, pp. 453-459, 2024.

Abstract:

Financial distress is the most concerning matter that creates vulnerability the firms and affects their sustainability, though it is a common scenario for the financial institutions of Bangladesh nowadays. Predictions regarding financial distress have a significant role for banks. This research aims to empirically prove the role of financial ratios in predicting financial distress. Return on Asset (ROA) and debt on Equity (DOE) have been measured. To prove the predictability of ratios, profitability, liquidity and leverage of the sample banks have been analyzed. The research population comprised all listed banks in the Dhaka Stock Exchange. The research sample was obtained from 15 banks as a sample. This study uses Ridge regression analysis. This study provides evidence of the significant role of profitability, liquidity, and leverage on financial distress conditions in the banking sectors. First of all, profitability contributes as the negative predictor to predict financial distress conditions. On the other hand, liquidity has almost zero impact on predicting financial distress conditions. Here, leverage contributes as the key player in predicting financial distress conditions. The vulnerability in the financial condition of a bank can be clearly identified by estimating a significant positive role of leverage on financial distress. In the banking sector, banks are expected to pay attention to the level of debt utilization. However, a greater level of leverage can minimize the chance of the banks experiencing financial distress, but other effects on the use of debt need to be considered. The main purpose of this study is to determine the role of financial ratios in predicting financial distress in a normal economic situation. The relevance of financial ratios in foretelling financial distress in the banking industry is supported empirically by this study. The results show that variables related to profitability, liquidity, and leverage have a significant impact on distress situations. To reduce the danger of financial distress, the report advises banks to put leverage first and use caution when using debt. Future studies are encouraged to look into how financial ratios might be used to forecast financial distress in other industries.

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Keywords:

Financial distress, financial ratios, profitability, liquidity, leverage.