Financial Ratios as Empirical Predictors of Risk and Distress

Abstract

Financial Distress Risk denotes the possibility of a company going bankrupt, which is contingent upon its access to credit and the extent of its liquid assets. It characterizes a scenario in which a firm encounters challenges in its operational, managerial, and financial aspects. This paper aims to examine the effects of financial ratios on financial distress risk in Nepalese commercial banks using modified Altman Z-score as measure of financial distress risk, the study employed secondary data for three banks listed in Nepal Stock Exchange for the study period from 2012/13 to 2021/22. The result shows that liquidity have significant positive effect on Z-score indicating lower financial distress risk of firms. Profitability have insignificant negative effect on Z-score. Similarly, leverage and efficiency have insignificant negative and positive impact on Z-score. This study offers valuable insights into the regulatory framework and supervisory authority overseeing banks. It emphasizes the importance for managers to actively manage the bank's liquidity position and develop effective strategies to maximize profitability, thereby mitigating the risk of financial distress. KEY WORD: Financial Distress Risk, Z-score, Financial Ratios.