ASSESSING FINANCIAL DISTRESS IN PAKISTANI MANUFACTURING FIRMS: THE ROLE OF PROFITABILITY, LIQUIDITY, LEVERAGE, FIRM SIZE, AND FREE CASH FLOW

Abstract

This study looks at how five important financial indicators-profitability, liquidity, leverage, firm size and free cash flow-affect whether manufacturing companies in Pakistan run into financial trouble. Using the Altman Z‑Score, a popular measure of bankruptcy risk, we examine financial data from 2018–2023 collected by the State Bank of Pakistan. Each company is classified as healthy, borderline or distressed based on its score. We then use panel data analysis to see how the five indicators relate to financial distress. The results show that companies with good profits and strong cash positions are much less likely to get into difficulty, while those that rely heavily on debt are more vulnerable. Being large helps to an extent, but poor management can still drag down big firms. Companies with plenty of free cash flow have a buffer that helps them keep operating and service their debt when conditions worsen. These findings provide practical insights for investors, managers and policymakers who want to strengthen the financial resilience of Pakistan’s manufacturing sector.