Impact of Financial Distress on the Profitability of Selected Manufacturing Firms of Ethiopia

Abstract

In recent decades manufacturing sectors are suffering from financial distress.  Profitability is presumed to play a role in addressing this problem. With this in mind, the main objective of the study is to determine the relationship between financial distress and profitability of manufacturing firms in Ethiopia for the period from 1999 to 2005. Due to non-homogeneity data, non-continuity and because the Hausman test favors it over the Random Effect technique, the panel data General Least Square  (GLS) regression method is used. The result proves that profitability has positive and significant influence on debt service coverage as proxy for financial distress.  Banks should supervise the profitability of firms at time of loan approval to avoid default risk caused by operational insolvency. The appropriate firm executives should consider improving profitability of firm through replacement of departments, products or lines of the business. FD have a negative impact on profitability and leading firms to insolvency and shortage of cash flow for current payment of debts and results in several consequential effects.

Keywords: Financial Distress, Profitability, Ethiopia