Reading the Warning Signs: A PRISMA-Guided Systematic Review of Liquidity, Leverage, Profitability, and Firm Size as Determinants of Financial Distress
DOI:
https://doi.org/10.61656/sbamr.v7i1.531Keywords:
Financial Distress, Firm Size, Food and Beverage, Leverage, Liquidity, ProfitabilityAbstract
Purpose: This study systematically reviews recent empirical evidence on four financial characteristics that are widely used to anticipate corporate financial distress, namely liquidity, leverage, profitability, and firm size, with particular attention to Indonesian listed companies and the food and beverage sub-sector. It responds to the contradictory findings that make it difficult for managers, investors, and regulators to know which warning signals deserve the most weight.
Method: The review follows the PRISMA 2020 statement. Eight search strings were run in the Crossref database for peer-reviewed journal articles published between 2020 and 2024 with abstracts available, and citation tracking added key studies cited in the original research proposal. Records were de-duplicated, screened by title, and assessed for eligibility against predefined criteria. Included studies were coded by country, sector, period, analytical technique, distress proxy, and the direction of each determinant, and the evidence was synthesised through vote counting and thematic analysis framed by signalling theory.
Findings: Leverage emerges as the most consistent warning signal, since higher debt is more often associated with greater distress than with less. Profitability is the strongest protective factor whenever a direction is reported, although part of this strength reflects its overlap with the profit-based components of common distress models. Liquidity is frequently insignificant and occasionally reversed, suggesting that static current-asset ratios are a weak signal when assets are tied up in inventory and receivables. Firm size rarely has a direct effect and appears to work mainly as a condition that changes the influence of other ratios. Food and beverage studies confirm the importance of profitability but provide limited evidence for liquidity and size.
Implication: Managers and analysts should give priority to leverage and profitability when monitoring distress risk, complement liquidity ratios with cash-flow and working-capital indicators, and interpret firm size in relation to sector conditions. Researchers should report the distress proxy and direction of effects explicitly, avoid models in which predictors and proxies overlap mechanically, and use longer panels and sector-specific designs.
Originality: The review provides an integrated, direction-focused synthesis of the four most commonly tested financial ratios, shows how measurement choices and sector characteristics produce contradictory findings, and draws out implications for the fast-growing but competitive food and beverage sub-sector listed on the Indonesia Stock Exchange.
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