Examining the effect of operating cash flow on financial distress: An evidence from Indonesian state-owned enterprises (SOEs)

Abstract

Financial distress is a situation under which a corporation or individual cannot produce enough profits or revenue, leaving it unable to satisfy or pay its financial obligations. In general, this is due to high fixed costs, a high amount of illiquid assets, or sales and operating cash flow that is vulnerable to economic downturns. Operating cash flow (OCF) calculates the amount of money generated by a company's regular business activities. The operating cash flow shows if a business can produce adequate cash flow to sustain and expand its operations; otherwise, external capital investment funding could be needed. This study motivated by the existence of gap previously published, which stated that several State-Owned Enterprises (SOEs) experienced financial difficulties due to losses, dependencies on funding for government subsidies, and the need for additional capital investment. This study seeks to examine the effect of operating cash flow on Indonesian SOEs' financial distress in conjunction with the issue. This study uses a time series data with a total sample is 31 SOEs out of 51 SOEs due to financial difficulties for 5 year started 2014 to 2018 and collected from the personal SOEs website. This study found that operating cash flow has a significant effect on SOEs' financial distress. In conclusion, the operating cash flow is categorised as a crucial factor that affects SOEs' financial distress in Indonesia. This study implies that using a marginal approach via score value is more realistic to measure financial distress. This study can also help the stakeholders, especially the government, consider assessing and evaluating the level of financial distress faced by Indonesia SOEs.