FINANCIAL DISTRESS INDICATORS OF INDIAN MANUFACTURING COMPANIES– A FACTOR ANALYSIS APPROACH

Jyoti Nair, J. K. Sachdeva

Abstract


Manufacturing sector is critical for any developing economy. Indian manufacturing sector, contributing to around 17% to country’s GDP is witnessing widespread distress. Many companies are reporting losses for continuous years. The Banking sector is heavily stressed due to bad loans to manufacturing sector. Insolvency proceedings are being initiated against many large companies in manufacturing sector. A distressed company adversely affects its stakeholder’s viz. investors, lenders, employees and government leading to wealth and capital erosion. In such times, it is important to capture early indicators of distress to develop measures to overcome the situation thereby preventing bankruptcy.  This study seeks to examine and identify factors indicating financial distress in listed manufacturing companies in India. Financial ratios reflecting profitability, solvency, efficiency and cash flows are used as variables. Factor Analysis and Logistic Regression is adopted to identify significant variables. It is observed that efficiency in operations is a key factor influencing a company’s profitability and survival.


Keywords


Manufacturing sector, Financial Distress, Financial ratios, Factor Analysis, Logistic Regression

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