Multiple Discriminant Analysis (MDA) in Micro Enterprise Financial Distress Evaluation

Abstract

This study aims to assess the usefulness of Multiple Discriminant Analysis (MDA) and financial ratios in evaluating financial distress in micro-enterprises, addressing a gap in the literature. Using Signaling Theory, this research examines how information provided by management or business owners can influence external parties' perceptions, potentially impacting the enterprise's value. The study employed a quantitative research method, utilizing primary data from questionnaires completed by micro-entrepreneurs in Tanjungpinang City, Indonesia. Financial information provided by these micro-enterprises formed the basis of the analysis. A positivist paradigm with a deterministic philosophy guided this research, where multiple linear regression analysis was used to predict how changes in independent variables impact financial distress. The results indicate that MDA is effective in assessing financial distress among micro-enterprises. Specifically, profitability ratios (EBIT/Total Assets, ROA, ROE, and NPM) and leverage (Debt Equity Ratio - DER) significantly influence financial distress. However, liquidity (Working Capital/Total Assets) and activity ratios (Total Assets Turnover) do not have a significant effect. This study contributes to the literature on financial distress, particularly in micro-enterprises, and provides valuable insights for government efforts to develop financial transaction recording applications for micro-enterprises. The findings highlight that adequate and reliable financial data are crucial for evaluating the condition and prospects of micro-businesses. The absence of such data can hinder internal and external stakeholders from assessing the business's condition. Therefore, a simple application for financial transaction recording is necessary to help micro-business units track their financial obligations effectively, as the DER ratio can indicate their ability to meet both long-term and short-term liabilities, and its insufficiency may lead to financial distress.