Predicting Financially Distressed Small- and Medium-sized Enterprises in Malaysia

Abstract

This study investigates factors that might predict financially distressed small- and medium-sized enterprises (SMEs) 4 years, 3 years, 2 years and 1 year prior to distress. We employ logistic regression to identify the predictors of distressed SMEs in the manufacturing sector. Debt ratio is found to be consistently significant throughout the period of study. It is the main cause of failure among SMEs in Malaysia, as they rely heavily on debt to support their operations. The finding also shows that young companies have a higher probability of failure than established companies and that the bigger the size of a company, the higher the probability of that company entering distress. Other factors that are also found to be significant are current ratio, short-term liabilities to total liabilities, return on assets, sales to total assets and net income to share capital. In addition, the 1-year and 2-year prior to distress models provide the highest accuracy rate in detecting financially distressed SMEs.