Effect of Profitability Ratio on Bankruptcy Prediction of Dairy Cooperative Societies in Meru County, Kenya

Abstract

Many sectors of the economy across the globe are concerned with the avoidance of bankruptcy in order to operate as going concerns. The purpose of this study was to analyse the influence of financial analysis on bankruptcy prediction for dairy cooperative societies in Meru County, Kenya. The objective of the study was to determine the influence of profitability ratio on the bankruptcy prediction of dairy cooperative societies in Meru County, Kenya. The hypothesis was derived from the objective of the study. The research was anchored on value maximisation theory. Descriptive and correlational research designs were used. The target population of the study was 13 dairy cooperative societies in Meru County that were in operation and had audited financial statements for the period of study (2017-2021). A census survey of all 13 dairy cooperative societies was conducted. A checklist was used to collect the secondary data, which was analysed using descriptive statistics and a bivariate model. The significance of the predictor variable on bankruptcy prediction was tested using the t-statistic, and the overall significance of the model was tested using the f-statistic at a 5% level of significance. The research findings were presented in the form of tables and graphs. The study established a statistically significant positive relationship between profitability ratio and bankruptcy prediction (coefficients=12.415, p=0.017<0.05) at a 5% level of significance. The management of dairy cooperative societies is encouraged to closely monitor the financial indicators of profitability. The findings of this study would be important to policymakers, such as the management of dairy cooperative societies and farmers who are key stakeholders in dairy cooperative societies. Scholars and researchers would find this study being of great interest since the gap for further research has been provided