ANALYSING THE RELATIONSHIP BETWEEN PROFITABILITY, LEVERAGE, AND BANKRUPTCY RISK: A COMPARATIVE STUDY OF DISTRESSED AND NON-DISTRESSED FIRMS

This study investigates the interrelationship between profitability indicators and leverage in the context of bankruptcy risk, based on data from Romanian small and medium-sized enterprises (SMEs) over the period 2021 2023. By analysing the gross profit margin ratio, return on assets (ROA), and the equity gearing ratio, the research aims to identify early warning signals of financial distress. The findings reveal clear distinctions between the two categories of firms—distressed and non-distressed—highlighting that a high level of leverage, when correlated with declining profitability, serves as a significant predictor of financial difficulties. The combined analysis of these indicators proves more relevant in estimating bankruptcy risk, as interpreting them in isolation may provide an incomplete view of an entity’s financial health. Only by jointly assessing profitability and leverage levels can robust conclusions be drawn regarding financial vulnerabilities. This integrated approach enhances the early detection of economic difficulties, offering a practical tool for risk management and supporting firms in making preventive decisions aimed at forecasting bankruptcy risk and ensuring business continuity..