The Importance of Profitability

Oct 13, 2025 by recoveryshake.com 141 views

Analysis of Financial Ratios to Measure Financial Distress Predictions at BUMD PDAM Regency/City in North Sumatra Province

Introduction

In the realm of financial management, understanding the financial condition of Regional Owned Enterprises (BUMD) is crucial for their survival and growth. The Regional Water Supply Company (PDAM) in North Sumatra Province is no exception. This research aims to analyze financial ratios, including profitability, liquidity, and solvency, to predict financial distress in BUMD PDAM Regency/City in North Sumatra Province. The study focuses on the 2017 fiscal year to 2021, using an associative causal method with a quantitative approach.

Methodology

The research population includes all BUMD PDAMs in North Sumatra Province, with a sample of 16 BUMD PDAM selected using nonprobability sampling, specifically purposive sampling. The data obtained was then analyzed using logistics regression with the help of EViews 20 software. The financial ratios used in this study include:

Profitability: Measured using the Return On Equity (ROE) ratio, which reflects the efficiency of the company in generating profits from their equity.
Liquidity: Measured through the current ratio (CR), which indicates the company's ability to meet short-term obligations.
Solvency: Measured by the Debt to Total Assets Ratio (DAR), which reflects the company's debt structure.

Deeper Analysis

The analysis of financial ratios can provide valuable insights into the financial health of a company. In the context of profitability, a high ROE reflects the efficiency of the company in generating profits from their equity. The finding that profitability has a positive effect on financial distress shows that BUMD PDAMs that are able to maintain high profitability tend to be able to survive in the face of financial difficulties.

Conversely, the lack of influence of liquidity and solvency on financial distress may indicate that although companies can meet short-term obligations (liquidity) and have a controlled debt structure (solvency), it is not enough to protect them from unfavorable financial conditions. This may be caused by external factors that further influence BUMD financial stability, such as changes in government policy, fluctuations in raw material prices, or diverse levels of demand in each region.

The Importance of Profitability

The results of this study highlight the importance of profitability as the main indicator of financial distress. Developing strategies that support increased profitability, such as operational efficiency and improving service quality, can be an important step to minimize the risk of financial distress. BUMD PDAM management needs to pay more attention to the profitability aspect and develop strategies to improve it.

Conclusion

This study provides a clear picture of how financial ratios can be used to predict the possibility of financial distress in BUMD PDAM in North Sumatra Province. The findings show the importance of profitability as the main indicator, while liquidity and solvency require further attention to understand a broader context. BUMD PDAM needs to continue to adapt and improve its financial strategies in order to face challenges and maintain its operational continuity in the future.

Recommendations

Based on the findings of this study, the following recommendations are made:

BUMD PDAM management should pay more attention to the profitability aspect and develop strategies to improve it.
BUMD PDAM should continue to adapt and improve its financial strategies in order to face challenges and maintain its operational continuity in the future.
Further research should be conducted to understand the broader context of financial distress and the influence of external factors on BUMD financial stability.

Limitations of the Study

This study has several limitations, including:

The sample size is limited to 16 BUMD PDAM, which may not be representative of all BUMD PDAM in North Sumatra Province.
The study only focuses on the 2017 fiscal year to 2021, which may not capture the full range of financial distress predictions.
The study only uses financial ratios as indicators of financial distress, which may not capture the full range of factors that influence financial distress.

Future Research Directions

Future research should focus on:

Conducting a larger-scale study to capture a more representative sample of BUMD PDAM in North Sumatra Province.
Using a longer time period to capture the full range of financial distress predictions.
Incorporating other factors that influence financial distress, such as macroeconomic factors and policies.

Conclusion

In conclusion, this study provides a clear picture of how financial ratios can be used to predict the possibility of financial distress in BUMD PDAM in North Sumatra Province. The findings show the importance of profitability as the main indicator, while liquidity and solvency require further attention to understand a broader context. BUMD PDAM needs to continue to adapt and improve its financial strategies in order to face challenges and maintain its operational continuity in the future.
Q&A: Analysis of Financial Ratios to Measure Financial Distress Predictions at BUMD PDAM Regency/City in North Sumatra Province

Q: What is the main objective of this study?

A: The main objective of this study is to analyze financial ratios, including profitability, liquidity, and solvency, to predict financial distress in BUMD PDAM Regency/City in North Sumatra Province.

Q: What are the financial ratios used in this study?

A: The financial ratios used in this study include:

Profitability: Measured using the Return On Equity (ROE) ratio, which reflects the efficiency of the company in generating profits from their equity.
Liquidity: Measured through the current ratio (CR), which indicates the company's ability to meet short-term obligations.
Solvency: Measured by the Debt to Total Assets Ratio (DAR), which reflects the company's debt structure.

Q: What is the significance of profitability in predicting financial distress?

A: The study finds that profitability has a positive effect on financial distress, meaning that BUMD PDAMs that are able to maintain high profitability tend to be able to survive in the face of financial difficulties.

Q: Why is liquidity not a significant indicator of financial distress?

A: The study finds that liquidity does not have a significant effect on financial distress, which may indicate that although companies can meet short-term obligations, it is not enough to protect them from unfavorable financial conditions.

Q: What are the implications of this study for BUMD PDAM management?

A: The study suggests that BUMD PDAM management should pay more attention to the profitability aspect and develop strategies to improve it. This can be achieved through operational efficiency and improving service quality.

Q: What are the limitations of this study?

A: The study has several limitations, including:

The sample size is limited to 16 BUMD PDAM, which may not be representative of all BUMD PDAM in North Sumatra Province.
The study only focuses on the 2017 fiscal year to 2021, which may not capture the full range of financial distress predictions.
The study only uses financial ratios as indicators of financial distress, which may not capture the full range of factors that influence financial distress.

Q: What are the future research directions?

A: Future research should focus on:

Conducting a larger-scale study to capture a more representative sample of BUMD PDAM in North Sumatra Province.
Using a longer time period to capture the full range of financial distress predictions.
Incorporating other factors that influence financial distress, such as macroeconomic factors and policies.

Q: What are the practical implications of this study for BUMD PDAM?

A: The study provides a clear picture of how financial ratios can be used to predict the possibility of financial distress in BUMD PDAM in North Sumatra Province. BUMD PDAM needs to continue to adapt and improve its financial strategies in order to face challenges and maintain its operational continuity in the future.

Q: What are the policy implications of this study?

A: The study suggests that policymakers should consider the importance of profitability in predicting financial distress and develop policies to support BUMD PDAMs in improving their profitability.

Q: What are the future challenges for BUMD PDAM?

A: The study suggests that BUMD PDAM will face challenges in maintaining its operational continuity in the face of financial difficulties. BUMD PDAM needs to continue to adapt and improve its financial strategies to face these challenges.

Q: What are the future opportunities for BUMD PDAM?

A: The study suggests that BUMD PDAM has opportunities to improve its profitability and reduce its financial distress by developing strategies to improve its operational efficiency and service quality.