Assessing Financial Distress and its Association with Leverage, Liquidity and Profitability: Evidence from Textile Industry of Bangladesh

Abstract

Objective: The study is aimed to determine the occurrence of financial distress and its interconnections with leverage, liquidity and profitability in the listed textile companies of Bangladesh prevailing for the period of 2011 to 2021. Design/methodology: This empirical study is based on the secondary data. The data for this study is retrieved from the annual financial statements of textile companies listed in Dhaka stock exchange (DSE). The analysis examines 33 firms over a period of 11 years stretching from 2011 to 2021. Altman Z score model is used here as a barometer for assessing financial distress in Bangladeshi textile industry. Considering the financial distress as a categorical variable forward (stepwise) logistic regression model is used to address the association of leverage, liquidity and profitability with the financial distress. Results: Results of Z score confirmed that seventeen firms were in safe zone during the whole study period when nine firms showed a distressing tendency during the whole study period. Further the study concluded that liquidity (in model III) and profitability (in model II & III) have significant negative influence on the probability of financial distress. Where, leverage held significant negative influence on the financial distress throughout estimated model I, model II and model III. Significance: This study may be used as an effective tool for the firm’s management, policy makers, stockholders, government and other interested parties of Bangladeshi textile industry. This study can serve as valuable evidence for firm’s managers regarding any financial decisions or to detect early signal of financial distress. The revealed influences of leverage, liquidity and profitability on financial distress will serve as a benchmark for the managers to set up various controlling measures. Keywords: Altman Z score, Bangladesh, Bankruptcy, Financial distress, Leverage, Liquidity, Logistic regression, Profitability, Textile industry