THE FINANCIAL DISTRESS PREDICTION AND FACTOR AFFECTING

TOWARD COAL MINING COMPANY (Empirical Study at Coal MiningCompany

Listed on the Indonesia Stock Exchange Year 2014-2017)

DIANDRA RENALDY JAYAWARDHANA

INTERNATIONAL MANAGEMENT UNDERGRADUATE PROGRAM
Jl. Mayjen Haryono 167, Malang 65145, Indonesia
E-mail: [email protected]

ABSTRACT

Thegoal of this study was to testwhetherliquidity, financial leverage, profitability, and activity able
to predictfinancial distress in the coal mining sector of Indonesia companies listed in the Indonesia Stock
Exchange.Explanatory research is the nature of this research. Secondary data was used and obtained
through review of literature including articles, journals and published financial reports and accounts. The
study used several financial ratios in financial reports of groups of financially distressed companies and
actively sound companies in Indonesia period 2014-2017 with the goal to determine the most significant and
reliable ratiosfor predicting financial distress. The sampling technique used purposive sampling and the
research instruments were tested using the Goodness of Fit Test, and Wald Statistic Test. The hypothesis
extracted withBinary Logistic Regression Model. Like in some previous studies the companies were stated as
distressed if the company has negative net income for 2 consecutive years. Results of the data analysis from
Binary Logistic Regression confirmed that financial leverage, profitability, and activity of the company have
a significant effect partially to financial distress. From the wald statistic test results,activitywas found to be
the bestratio for determiningfinancial distress. The results from this study can be applied to take corrective
actionwhen necessary to minimize company failures. Investors and creditors will also be able avoid placing
their resources in financially distressed companies unconsciously.
Keywords: liquidity, financial leverage, profitability,activity, financial distress
Introduction 2014-2017 12 companies from Indonesia
Stock Exchange have been delisted, and 2 of
Company establishment has a goal of the 12 delisted companies comes from coal
profit maximization.Company must obtain mining sector.
profit, increase sales, and increase the
company’s net worth in order to reach it. Fierce competition plus sluggish
Nowadays, market becomes more volatile, economic growth on the world during 2014-
and uncertain. Customers preferences rapidly 2016 especially in export destination country
change and they are very hard to loyal. for instance China, Europe, and India with
Competitors also sell similar product with the highest demand for coal create negative
different type and uniqueness which makes impact to coal mining indstry. Companies
competition tougher. At the same time, should understand their intrinsic value
company also does not want to lose market especially during economic uncertainties.
share which later will result in negative net Many factors mentioned above can cause this
operating income, and negative cash flow. value to go down. That is why, companies
Thus, the possibilities for company to need to detect potential problem that might
maintain its sustainability become more occur in future. On the other side, this
difficult. Mining sector becomes important situation makes investors and creditors
pillar for economic development in evaluate their investment on coal mining
Indonesia. This sector is never absent on top industry whether it is still profitable or not.
5 GDP contributor each year. Somehow,
since 2011 until 2016, this sector is The coal mining company should be
experiencing a decline. aware of the challenge in future, especially
the possibility of controversial policy energy
Low coal price and there is still no from the Chinese and India’s Government.
sign of increasing demand from China, India, The Government of China issued to continue
and South Korea become the main reason. its reduction in domestic coal production
Indonesia as one of the richest mineral and program and domestic coal price control
ore production also gets this strong impact. program. Coal import to China will also be
All minerals and ores prices are depending on minimzed in order to protect domestic coal
market responses which make its price very producers.The same policy is also
is sensitive towards global demand and implemented by the Government of India
supply. Coal prices remained under pressure which encourages the increase of domestic
throughout 2014 due to continuous global coal consumption and reduces coal import
oversupply. Whereas in Indonesia, debt gradually. This situation may put company in
servicing problems resulted in increased trouble.
production from many domestic suppliers.

Coal prices at that time become Financial ratios help companies to be

lower than operational costs. The Coal Price aware on their financial condition ,and put an
Index (HBA) has declined between January early warning signal of possible impending
until December 2014 from USD81.9 per bankruptcy. Companies should check their
Metric Ton (MT) to USD64.7 per MT, and liquidity, leverage, profitability, and activity
high cost of acquisition new coal sources before deciding strategy because these factors
contribute on declined company might help determining financial distress.
performance. This situation consume
Financial ratios are beneficial to both
company’s reservoir which makes company
internal and external analysts of the firm.
mustsustain until coal prices recover and start
Always note that ratios are simply fractions
to decrease production capacity to make up
with a numerator (top) and a denominator
losses. However, a combination of lower
(bottom). There is no set group, or even a
selling prices and a reduced production level
particular ratio always computed using the
led to a decline in the Company’s revenue.
same formula (Gibson, 2012:212).Financial
Unfortunately, those condition affected coal
ratios connect two financial data by dividing
mining industry in Indonesia. According to
one number with another(Horne, Wachowicz,
data from www.sahamok.com, between
2013:163).Ratio analysis will produce a higher. Then, the possibilities of illiquidity is
comparison which prove more useful increasing since company should prepare
measurement rather than just seeing amount more current asset to cover the current
of each financial data.Predicting bankruptcy liabilities. Liquidity represents company
help underlying strength or weakness in abilities to paid their short-term obligation.
certain ratios when ratio is combined or Liquidity measures how assets are converted
decomposed (Baker & Powell, 2009: 46) The into cash quickly. The power is exist while
results usually in term of percentages, the current asset is bigger than current
multiples, or time periods. Besides,ratio liabilities. Liquidity becomes one of the
analysis also eliminates the size problem significant factors to determine success or
since the size effectively divides out failure in a company. Liquidity also become
(Stephen, Randolph, and Bradford, 2012:56). information for creditors and shareholders
Therefore, financial ratios are useful in about company capabilities to pay interest at
predicting business financial difficulties. the time specified in the contract.

Financial distress occurs because the Financial leverage become the extent
company cannot maintain the financial to which a company uses financial leverage
performance stems from a failure can be measured by analyzing a company’s
inpromoting the product made which causes debt structure and profit pattern (Friedlob &
the decline in sales so that thedecreased Welton, 2008:171).Financial leverage
revenue from less sales allows the company specifically measure financial vulnerability.
to experience operationallosses and net loss This can make company have greater risk
for the year running (Rayenda, 2007). The profile than unlevered equity. A firm
magnitude of financial distress costs are vary weakened by too much leverage have higher
in each industry. For example, firms, in business risk, and company shall pay more
mining company, which depend largely from interest rates on borrowed funds (Friedlob &
human capital and machinery are likely to Welton, 2008:171). This situation makes firm
incur higher risk of financial distress highly volatile and its capital expenditure is
especially on high- levered firms. unpredictable (Palepu & Healy, 2008:213).

Financial distress is particularly Profitability also plays an important

severe since firms tend to do things that are role to determine financial distress.
harmful to debtholders like creditors and Profitabiity ratio become the most known
stockholders.This situation can make ratio to value a company. According to
financially distressed firms with high (Stephen, Randolph, and Bradford, 2012:63)
leverage may manipulate their accounting Financial performance is often measured with
policies to temporarily avoid technical the efficiency on asset utilization and
default. Until the firm is stated bankrupt, the managing operation. Income is very
stockholder control it (Ross, Westerfield, important for the company because in order
Jordan, 2003:586). If this happens to maintain its survival a company must be in
continously until it reaches minimum a profitable state. Without profit, it will be
standard, company can resign from the harder for companies to attract capital from
Indonesia Stock Exchange. Indonesian stock outside source. According to (Robinson,
market usually look out for other company Elaine, and Pirie, 2015:329). Profitability
who wants to buy all ownerships in the measures company's return at certain levels
company in 60 days. If there isn’t any of sales, assets and capital stock during a
interest from other company, then the period.Financial distress companies in
company can liquidate all of its asset to cover several years sustained operating losses
losses. which force them for rapid and aggresive
dividend reductions (Lang and Netter, 1992).
Coal mining company experienced Manager refuses to lower dividend, and only
the downturn due to the coal price on 2014- increase dividend except the company
2015 are held at the low level due to the anticipate higher earnings in the future. This
oversupply. Companies debt payment process situation makes firms must increase their
might ruined if the coal prices not getting profitability. Profitability not only represent
company power to generate net income but on financial distress are current ratio,
also become the first matter to be noticed by operating capacity, and sales growth. These
investor and creditor before they invest the variables have significant effect toward
money. This is also the reason why the financial distress, while leverage ratio cannot
payout ratio is likely to rise temporarily when affect financial distress. This research is in
company earning falls unexpectedly in order contrast with Kusumawardana, and Alfikri’s
to keep company attractive to investors. research.
Companies who decline continously In terms of differences, this research
is threatened by financial distress. Financial puts more focus on observed companies
distressed firms tend to lose employees, which is coal mining sector on Indonesian
suppliers, and their financial flexibility. After Stock Exchange. The research period and the
that, company lose accuracy of the financial ratios are used to determine
operational performance which ruined the financial distress and non-financial distress
sustainability of a company. This factor may companies. The financial ratios used in this
results from low activity because company study are Current Ratio (CA / CL) to
generates sales lower than the total assets represent liquidity, Debt to Equity Ratio (TL
owned by the company.Assets lose value / TE) to represent financial leverage, Return
because management focus is distracted to on Assets (NI / TA) to represent profitability,
avoid bankruptcy, rather than keep running and Total Asset Turnover (S / TA) to
on company business. Thus, normal represent activity. Coal mining sector on
operating activities disruptedand gradually, 2014-2017become the sample used in this
lost more sales. Activity is proxied with total research. This sector has become interesting
asset turnover which calculated by dividing to learn because in the last 4 years, this
sales with total asset industry has experienced difficulties that
have caused a decline in the company's
Researches regarding financial ratio financial and operational performance which
to measure its effect to financial distress are result 2 delisting companies from Indonesia
done many times in the past. Research from Stock Exchange (IDX) in the period of
Kusumawardana (2013) uses 4 financial 2014-2017. This can be seen as the result
ratios to measure financial distress. The result from difficulty of generating high
of this research shows that leverage ratio profitability due to coal prices which
which is represented by debt ratio, return on continued to weaken until 2015 and lack of
asset which values profitability, and growth management anticipation to face global
measured from sales affect on financial economic downturn.
distress. Meanwhile, liquidity ratio measured
by current ratio, and inventory turnover does According to the background, theory, and
not affect financial distress. Debt ratio gives previous research, the proposed hyphothesis
the most dominant effect on financial are stated :
distress.
H1 : Liquidity has significant effect towards
Financial ratios as predictor for financial distress
financial distress in coal industry has been H2 : Financial Leverage has significant effect
tested before by Alfikri (2017) on period towards financial distress
2011-2015 with current ratio, debt to equity H3: Profitability has significant effect
ratio, return on asset (ROA), and working towards financial distress
capital. This research reveals that debt to H4: Activity has significant effect towards
equity ratio, and return on asset are financial distress
significant on financial distress, meanwhile H5: Total Asset Turnover which represent
current ratio and working capital are not activity has dominant effect towards
significant toward financial distress. financial distress
In other research, Widhiari,and
Merkusiwati (2015) with current ratio, debt
ratio, operating capacity, and sales growth
mentioned the variable to measure the effect Research Method
 ratio.Table 4.6 and 4.7 shows the results for
Sampling technique in this research descriptive statistics for the overall financial
is done with purposive sampling technique, ratio variables used in the research can be
which means sample selection is based on explained as follow:
certain requirements.The sample that are
categorized as financial distress in this Table 4.6
research are: Financial Distress sample
1. Coal mining company whichis listed
continuosly on Indonesia Stock Exchange Financial Distress Frequency Percentage
(IDX) during the research period from 2014 Non Financial Distress 33 58.93
to 2017.
2. Companies that report their financial Financial Distress 23 41.07
statements every year and is audited from
2014 to 2017. The financial statements Total 56 100
should have a closing year ending on 31
December, and presented in dollar (US$).
3. The Company does not merge, acquisition,
Table 4.7: Descriptive Statistic for Whole
and other business changes during
Sample
observation period (2014- 2017).
Minim Maxim Mea Std.
The sampling method results 56 coal N
um um n Deviation
mining company which fullfill criteria during
four year observation. The variables on this 5 205.
CR 9.90 691.36 137.31
research is functioned as follows. 6 30

1. Financial distress (Y) become dummy RO 5

-64.39 38.03 5.05 14.21
variable which proxied with negative net A 6
income. The dummy variable score is DE 5 - 1190.9 155.
formed into : 287.97
R 6 717.40 0 84
a. 0 = Non-Financial Distress
(Healthy) TA 5 85.0
0.47 236.88 51.81
b. 1 = Financial Distress T 6 1
2. Liquidity (X1) proxied with current ratio
3. Financial Leverage (X2) proxied with
debt to equity ratio Source:Processed data, 2018
4. Profitability (X3) proxied with return on
asset Based on Table 4.6 and Table 4.7, the result
5. Activity (X4) proxied with total asset can be described as follow:
turnover
1. Financial Distress (FD) has output from
Logistic regression become technique to 56 observations in coal mining industry
analyze the whole data for all research listed in Indonesia Stock Exchange
variables. In order to understand the most (IDX). 33 observations or 58.93 percent
significant variables, this research will use is non-financial distress. On the other
wald statistic test to give clear results. for side, there are 23 observations or 41.07
each of them. percent is indicated with financial
distress. These number shown the
possibilities to enter financial distress
relatively much.
2. Liquidity which proxied by Current
Data Analysis Ratio (CR) has mean of 205.30 % with
minimum value 9.90% and maximum
Descriptive analysis is a statistic done to value 691.36%. According to the
data sample of current ratio debt to equity calculation, average liquidity of all
ratio, return on asset, and total asset turnover companies in samplecan stated as good
 since it exceed 100% as the standard usually act as predictor. Logistic regression
measurement. Firms increase their tests 4 financial ratios toward financial
demand for liquidity to fend off distress condition with the notion of odds
future financial distress.Somehow the ratio as the results of regression. In order to
minimum value of 9.90% shows there is do logistic regression, there are several steps
sample with high possibilities to enter need to be done:
financial distress since the number is 1. Goodness of Fit Test
very far from the minimum standard of Logistic regression model will be tested in
safe current ratio, but on the other side accuracy between logistic regression model
with the maximum value of 691% just prediction with observation data stated in
proves that company has lots of unused goodness of fit test.
fund which reduces company
profitability power. The mean score is Here is the result of Hosmer and Lemeshow’s
higher than the deviation standard that is Goodness of Test. This research the
2,0630>1,3731 significant degree is set to α = 5%
3. Financial Leverage which proxied with
Debt to Equity Ratio (DER) has mean Table 4.8
for 5.05% with minimum value -717%, Goodness of Fit Test Result
and maximum value 1190.90%. Based
Hosmer and Lemeshow Test
on the results, the debt to equity ratio
owned by company is big. The Step Chi-square df Sig.
minimum value of -717% shows the 1 6.996 7 .429
very small chances for company to enter
financial distress since the company
really has high equities. However, with The result above shows the Hosmer
the maximium value of 1191% itshows and Lemeshow test has a Chi-Square value of
the risk of financial distress can be very 6.996 with significance of 0.429. The
high since the company is insolvable. significance value is higher than α (0.05);
The mean score is lower than the therefore, null hyphothesis is accepted. To
deviation standard that is sum up, the model is able topredict
1,5588<2.87992. observation value because fit with the real
4. Profitability which proxied by Return on data.
Asset (ROA) has mean of 5% with The second step is evaluating overall model
minimum value -64% and maximum fit toward data. This step is done to test the
value 38%. This value shows that coal significance of the predictors by formulating
mining industry average profitability is the log-likelihood function
very low. Company with minimum (Hilbe,249:2009).When there is declining
value of -64% needs to stay alert since value between initial -2LL with -2LL on the
the possibilities to enter financial next step (last -2LL); therefore, the model
distress is very high due to their shows good regression model. The overall fit
incapabilities to generate net income. model testis stated on table 4.10 below.
Somehow, with the maximum value of
38%, it can be proof which shows there Table 4.10
is sample with high return on asset. The
mean score is lower than the deviation Overall Model Fit Test
standard that is 5.05<,1421 (Block Number=1)

Logistic Regression Test

Logistic regression model combines

dependent variable and one or more
predictors or explanatory independent
variables(Hilbe,xvi:2009).Usually,continuous
, categorical or indicator/binary variables
 Iteration Historya,b,c,d On table 4.13, there are 56 observations with
non-financial distress and the obsevation
Coeff icients
Iteration
-2 Log
likelihood Constant CR ROA DER TAT
result of 33 companies. After logistic
Step 1 52.412 1.825 -.002 -.043 -.002 -.014 regression test is conducted, there are 5
1 2 48.446 2.766 -.003 -.071 -.004 -.020
3 47.574 3.338 -.003 -.090 -.005 -.022
companies switch to financial distress side. .
4 47.513 3.530 -.004 -.095 -.006 -.023 Therefore, the classification accuracy for
5 47.513 3.548 -.004 -.096 -.006 -.023
6 47.513 3.548 -.004 -.096 -.006 -.023
non-financial distress company is 84.8%.
a. Method: Enter Meanwhile, the prediction for financial
b. Constant is included in the model. distress company is 23 companies and after
c. Initial -2 Log Likelihood: 75.837
being tested by logistic regression, there are
d. Estimation terminated at iteration number 6 because parameter estimates changed by
less than .001. 8companiesmove to non- financial distress.
Block number 0 test or after entering Therefore, the classification accuracy for
whole predictor, the -2 log likelood obtained financial-distress company is 65.2%. The
value of 75,837. Compared to the beginning average percentage of the classification test
likelihood of 75,837 , the decrease is (76.8%) proves the prediction and
significant which shows that model can observation data has a significant differences
explain independant variable and dependant which means the logistic regression model is
variable in a good way. In block number 1, good.
the -2 log likelihood value is 47,513. This Hyphothesis is analyzed with logistic
huge decline becomes a sign of relationship regression. The test is done to measure
between independent variable and dependent liquidity (current ratio), financial leverage
variables. (debt to equity ratio), profitability (return on
Cox and Snell’s R Square has value trying to asset), and activity (total asset turnover)
imitate R square on multiple regression towards company possibilities to enter
which is based on likelihood estimation with financial distress. Hyphothesis II is tested
maximum value ofless than 1. Nagelkerke’s with Wald test in order to see significant
R Square is modification from Cox and value in every coefficient in logistic
Snell’s to make sure it ranges from 0 to 1. regression. The output of Wald test is in term
This can be done by dividing Cox and Snell’s of equation which enter all independant
R Square with the maximum value. variable from Variable in the equation table.
Table 4.14

Hyphothesis test result

Table 4.12
Cox & Snell’s R Square and Nagelkerke’s R
Square Coefficient
Independent S.E Wa D Sig Exp
St -2 Log Cox & Snell Nagelkerke variable B . ld f . (B)
ep likelihood R Square R Square
-
1 47.513 0.397 0.535 0.0 0.0 1.3 0.2 0.99
CR 04 03 72 1 42 6

-
0.0 0.0 4.0 0.0 0.90
Based on table 4.12 Nagelkerke’s R ROA 96 47 69 1 44 9
Square value is resulted from the logistic
regression model with independent variables 0.0 0.0 4.0 0.0 0.99
is 0.535. The percentage of independant DER 06 03 76 1 43 4
variables which can explain the dependant
-
variable is 53.5%. Meanwhile, other 0.0 0.0 6.1 0.0 0.97
variables aside from this research financial TAT 23 09 01 1 14 7
ratio gave 46.5% toward financial distress
prediction. This number proves the 4 3.5 1.3 7.1 0.0 34.7
independent variables namely Current Ratio, Constant 48 22 99 1 07 41
Return on Asset, Debt to Equity, and Total
Asset Turnover.
Based on table 4.14 the formed regression lowersthe chances of financial distress
will increase. The significance value is
model is: lower than 0.05 (0.044<0.05) which can
be concluded that this variable has
𝐹𝐷 significant effect toward financial
𝐿𝑛 = 𝐷𝐼𝑆𝑇𝑅𝐸𝑆𝑆𝐸𝐷𝑖
1 − 𝐹𝐷 distress in coal mining companies.
Therefore, H3 is accepted.The results is
= 3,548 – 0,004 CR supporting research from Alfikri (2017).
d. For activityhyphothesis test which
+ 0,006 DER − 0,096 ROA proxied with total asset turnover, the
value of beta corellationis -0.023 with
− 0,023 STA significance value (p) of 0.014. The
negative relationship reflect the lower
Result and Discussion operating capacity (total asset turnover)
will enhance the possibilities for coal
a. The Hyphothesis Test above shows mining companies to enter financial
liquidity which proxied with current distress. The significance value is lower
ratio has beta corelation of -0.004 with than 0.05 (0.014<0.05) which shows the
significance value (p) of 0.242. The Total Asset Turnover has significant
negative relationship and the effect toward financial distress.
significance value is higher than 0.05 Therefore, H4 is accepted. The results
(0.242>0.05) which means there is no is agreed with Widhiari,and Merkusiwati
significant effect from Current Ratio (2015) research, meanwhile the results
toward financial distress. Therefore, H1 of this research reject Kusumawardana
is rejected.The results is supporting (2013) which stated activity cannot
Kusumawardana’s (2013), and Alfikri’s trigger financial distress.
(2017) research. Meanwhile, the results
is contrasting Widhiari,and Merkusiwati Conclusion and Recommendation
(2015) which stated liquidity can affect 5.1 Conclusion
financial distress. This research was conducted to
b. For financial leveragehyphothesis test point out which variables have influence
which proxied with debt to equity ratio, on Financial Distress, and determine
the value of beta correlation is 0.006 dominant independant variable. In this
with significance value of 0.043. The research the independent variables used
positive effect shows if company owns are the Current Ratio, Return On Assets,
high debt equity ratio, the company will Debt to Equity, and Total Asset Turnover
likely enter financial distress. The variables on Financial Distress. Based
significance value below 0.05 from research discussion, the following
(0.043<0.05)means that there is conclusions can be drawn
significant result from Debt to Equity 1. Regarding the research finding
ratio test toward financial distress. towards coal mining sector
Therefore, H2 is accepted.The results is company listed on Indonesia
rejecting research from Widhiari,and Stock Exchange, there are 6
Merkusiwati (2015) which stated companies from 14 observed
financial leverage is not significant companies who enter financial
toward financial distress, on the other distress based on 2 years
side the result support research from consecutive of negative net
Kusumawardana (2013), and Alfikri income and 8 healthy company
(2017). with classifiaction prediction of
c. TheHyphothesis Test results show 70% with classification for
profitability which proxied with return financial distress equal 66.7%
on asset has beta corelation of -0.096 and for healthy company is 86%.
with significantce value of 0.044. Therefore, financial distress
Negative relationship becomes a proof prediction model for this
when the value of return on asset research with financial ratio has
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