Abstract:
The study aims to identify and analyze key financial indicators and ratios that
can serve as reliable predictors of potential financial distress and to determine
the best model for predicting the occurrence of financial distress among listed
hotel companies in Sri Lanka. The research is carried out on a quantitative basis
with a positive paradigm. Out of 36 listed hotels in Sri Lanka, 21 were selected
based on the random sampling method, and the time spanning period is 2013 to
2022, with the observation of 201. Further, 18 variables are created under the
profitability ratios, leverage ratios, liquidity ratios, market ratios, activity ratios,
age, and company size and tested using a panel logistic regression model. Based
on the Hausman test, the random effect model is considered for interpretation.
The analysis revealed that Operating Profit Margin, Return on Assets, and
Operating Cash Flow to Total assets exhibited a significant negative relationship
with the probability of financial distress occurrence. In contrast, Debt to Equity
exhibited a significant positive relationship with financial distress. The random
model's Wald chi-square (χ^2) value is 105.97, with a probability of 0.000,
highlighting their importance in predicting financial distress. The overall
accuracy rate of the model is 88.6%. This model suggests that the probability of
financial distress will increase when profit margins are low, assets are less
effective in generating income, limited cash flow generation, and potential
liquidity challenges. Hence, investors, bankers, and managers can use this model
to predict the probability of financial distress when making financial decisions.
