Predicting Financial Distress Through Liquidity Analysis: A Study of Indian Steel Companies

ABSTRACT

The recent spate of global crises, including Covid-19 pandemic, Russia-Ukraine war and. the Sri Lankan crisis, have hindered the economic growth of almost all nations. The prevailing economic downturn has forced many organizations to assess their financial future and the possibility of financial distress. Financial distress is detrimental to all types of organizations and it is always advisable to avoid it because it creates a tendency for firms to do things that are not in favor of debt holders and non-financial stakeholders, impairing access to credit and deteriorating stakeholder relationships. The objective of this study is to predict the financial distress of firms by analyzing their liquidity position over a period of time and by assessing their working capital management strategy. The purpose is clear the sooner the detection, the easier it will be for companies to take various preventive measures. If it is possible to find out the situation well in advance, appropriate action can be taken to reverse the process before it is too late. The present study is an attempt to determine the possibility of financial distress in sample companies by analyzing their performance using various financial and statistical techniques. It was conducted by taking a sample of ten Indian steel companies for the period 2017-18 to 2021-22. The data has been analyzed using various financial ratios related to profitability, liquidity, solvency and Motaal's Liquidity Assessment Test and Spearman's Rank Coefficient of Correlation to find out whether companies are compromising their liquidity to increase profitability. The findings show that among the ten selected companies, NMDC has the best liquidity situation and is least prone to facing financial distress.