Investor Protection in Indonesia: Financial Ratios as Early Warning Indicators

Enggar Sukma Kinanthi; Sukmawati Sukamulja

doi:10.14414/jebav.v27i3.4851

Authors

Enggar Sukma Kinanthi Universitas Atma Jaya Yogyakarta
Sukmawati Sukamulja Universitas Atma Jaya Yogyakarta

DOI:

https://doi.org/10.14414/jebav.v27i3.4851

Keywords:

Financial distress prediction, Emerging Market, Indonesia stock exchange, Investor protection

Abstract

The Indonesian government aims to enhance public engagement in the capital market
by strengthening investor protection and financial literacy through the establishment
of a Watchlist Board. This study identifies the most effective financial ratios for dis
tinguishing between the performance of LQ45 and Watchlist Board firms. Using dis
criminant analysis, the research examines a sample of 43 firms from the LQ45 index
and 43 firms from the Watchlist Board between 2020 and 2022. The findings reveal
four key financial ratios with strong differentiating power: Total Asset Growth, Re
turn on Assets (ROA), Operating Cash Flow (OCF) to Current Liabilities, and OCF
to Total Liabilities. Additionally, the study develops a predictive model that can fore
cast company performance and serve as an early warning system for investors. Build
ing on prior research in this area, the results highlight the critical role of profitability,
efficient resource allocation, and robust corporate governance in fostering financial
stability and safeguarding investor interests. This study not only provides a practical
predictive model but also offers valuable insights for interpreting these financial ratios,
particularly in the context of investor protection within emerging markets, such as
Indonesia.

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