Predicting Financial Distress among Listed Hotels in Post-War Sri Lanka

Abstract

This study examines the financial indicators associated with financial distress among listed hotel companies in Sri Lanka and develops a model for predicting distress in a post-war tourism context. The analysis uses 21 hotel companies over the period 2013–2022. Financial distress is measured as a binary variable that takes the value of one when a company reports negative operating earnings, negative operating cash flow, or both, and zero otherwise. Profitability, liquidity, activity, leverage, market-based and firm-specific indicators are examined using logistic regression with company-clustered standard errors. The revised model is statistically significant and demonstrates satisfactory predictive performance, with an overall classification accuracy of 83.50 per cent and an area under the receiver operating characteristic curve of 0.913. The findings show that return on assets has a significant negative association with the probability of financial distress, indicating that hotels generating stronger earnings from their asset base are less likely to experience financial difficulty. In contrast, working capital to total assets has a significant positive association with distress probability, suggesting that a higher level of net current assets does not necessarily indicate financial strength when those resources are inefficiently employed or concentrated in less liquid operating assets. The remaining profitability, liquidity, activity, leverage, market and firm-specific variables are not statistically significant. The findings highlight the importance of asset profitability and effective working capital management in assessing financial vulnerability within the hotel sector. The model assists managers, investors, lenders and policymakers in identifying financially vulnerable hotel companies and taking timely corrective action.