DETERMINANTS OF FINANCIAL DISTRESS: THE CASE OF STAR HOTELS IN GONDAR CITY

Abstract

Financial distress remains a critical threat to business continuity across firms globally, regardless of size or industry. It refers to a condition where a firm experiences difficulty in meeting its financial obligations fully and on time. This study investigated the determinants of financial distress among star rated hotels in Gondar City, employing the Altman Z-Score model as a proxy for measuring financial distress. The study utilized a quantitative research approach and used both descriptive and explanatory research design. The researcher applied census technique and used secondary panel data collected from the target population of 10 star rated hotels over an eight-year period (2016–2023 G.C.). Key explanatory variables in this study were liquidity, leverage, profitability, efficiency, inflation, capital adequacy, and firm size. Data were analyzed using Random Effects Generalized Least Squares (GLS) regression with STATA software 14 version. The descriptive analysis showed that most hotels operated within the grey zone of financial distress, indicating moderate financial health. The regression results indicated that liquidity, profitability, capital adequacy, had a statistically significant positive effect on the financial health of hotels. The study recommends that hotel managers should focus on sound liquidity management, profitability strategies, adequate capitalization, and efficient management which are critical to minimizing financial distress in the hotel sector.