The Effect of Financial Ratios on Stock Prices Through Financial Distress as a Mediating Variable

Abstract

The Indonesian textile and garment sector has experienced persistent declines in stock prices, reflecting weakened corporate fundamentals and increasing risks of financial distress. Although previous studies have examined the relationships among financial ratios, financial distress, and stock prices, limited evidence explains the mediating role of financial distress in linking corporate financial performance to market valuation. Grounded in signaling theory, this study investigates the effects of Net Profit Margin (NPM), Total Asset Turnover (TATO), and Current Ratio (CR) on stock prices through financial distress measured using the Altman Z-Score. A quantitative explanatory approach was employed using secondary data from 14 textile and garment companies listed on the Indonesia Stock Exchange during the 2021–2024 period, yielding 56 firm-year observations selected through purposive sampling. The data were analyzed using multiple linear regression, path analysis, and the Sobel test. The results indicate that NPM, TATO, and CR simultaneously affect financial distress, while only CR demonstrates a significant positive partial effect, indicating that stronger liquidity contributes to improved financial health. Furthermore, only financial distress significantly influences stock prices, whereas NPM, TATO, and CR do not have direct significant effects. The Sobel test result (Z = 2.624; p = 0.0087) confirms that financial distress fully mediates the relationship between CR and stock prices. These findings support signaling theory by demonstrating that investors respond more strongly to firms’ overall financial health than to individual liquidity ratios. The findings provide practical insights for managers seeking to strengthen financial stability and enhance investor confidence.