Comprehensive Analysis of Financial Distress Factors in Pakistan’s Sugar Sector: Identifying Core Financial and Industrial Level Influences

Abstract

This research examines the important elements in the financial and organizational side that can result in distress for the country’s sugar industry. A sample of 28 sugar mills was studied by analyzing data from 2011 to 2020. The purpose of the study was to find out how important financial indicators correlate with financial distress. Examples of indicators are profitability, determined by the return on Assets, liquidity measured by the cash ratio, leverage based on the total debt to total equity ratio, and cash flow volatility. Researchers looked at financial distress using well known models, for example the altman z-score. Any firm with an altman z-score of more than 1.875 were marked as bankrupt “0”. Also moderating variables related to each firm were added to the study so their role in shaping the link between financial indicators and financial distress could be studied. To determine these moderators we used firm size which is based on a business’s total assets and classify it as large (1) if assets exceed the 10 year average or small if less than the average. A pooled regression analysis was used together with fixed and random effects to address any heterogeneity in data and the application of fixed vs random effects was decided using the hausman test. Analysis of data distribution involved making use of descriptive statistics. The analysis found that financial distress was much more common among companies that needed to earn more profit. It indicates that better profitability generally leads to less chance of financial trouble. Nevertheless, nothing close to statstical significance was found for how cash ratio or leverage played into financial distress. Although the cash ratio seemed to respond differently to financial problems and leverage depending on some situations, these results did not hold up statistically for a constant pattern. It was found that firm size had no significant effect on the main impact of independent variables on financial distress and based on the Rsquared value. The value for the F-statistic proved that the impact was not very strong. In short the findings underline how vital high profits are for preventing severe financial issues in capital intensive sectors like Pakistan’s sugar industry. The research recommends that sugar mills should aim for greater productivity, hold sufficient cash and new firms to study how older and more successful companies handle daily functions for growth. Researchers could also examine unlisted companies, study market manipulation, examine how financial statements are manipulated and add macroeconomic factors and regulatory policies to the models used to predict financial distress.