Financial Performance Evaluation and Distress Prediction model of Selected Grade One Building Contractors
No Thumbnail Available
Date
2019-07-09
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Addis Ababa University
Abstract
One of the main problem for evaluation of financial performance of Ethiopian construction industry
participants are accepting high working capital and revenue for the lowest bid. But it does not
guarantee for the performance of a construction company. This is reason why the study sets main
objective to compare and examine the performance and distress of selected grade one building
contractors in Ethiopia. As part of the approach to achieve this objective, the study first developed
industry average through desk study to evaluate the selected Grade-1 building contractor’s financial
performance. It identified by liquidity, profitability, operational efficiency and solvency ratios.
Then the study used the concept associated with these basic pillars, both to notify the analysis and
serve as a reference against which the selected grade one contractor’s financial ratios are compared.
The study adopted case study research methodology whereby five Grade 1 building contractors that
are registered under the Ministry of Urban Development, Housing and Construction are taken as
case in point. Moreover, the researcher requires that the financial statements submitted by private
companies comply with Generally Accepted Accounting Principles (GAAP). And the accessibility
of accounting statements has taken as a criterion. It employed data collected from documents and
through interviews. Based on this, a detailed analysis has been conducted to indicate construction
firm’s performance using Return on Asset (ROA) and Return on Equity (ROE) as a dependent
variable and Altman Z Score, Gross Profit Margin Ration (GPMR), and Total Debt to Equity Ratio
are as independent variables.
The study found out that Altman Z-Score distress prediction model was found to have the highest
accuracy in predicting the distresses of the studied construction firms among the others prediction
models (Springate and Zmijewski models).
As a result, the outcomes of the correlation coefficient analysis, and ANOVA F-test in multiple
regression analysis, the following conclusions were made:
1) The correlation analysis indicates that Altman Z score and GPMR have a positive relationship
with both of ROA and ROE, while the Debt to Equity ratio has a negative relationship with ROA
and a positive relationship with ROE; 2) The regression results show that, financial distress has a
significant impact to the firm’s financial performance; 3) Financial performance prediction model
results show that Altman-Z Score is robust in explaining both ROE and ROA. While, the majority
of the firm’s profit has been generated by debt, ROE will no longer used as an indicator of financial
performance.
Therefore, a crucial implication of the findings is the trend of application of liquidity, profitability,
operational efficiency, solvency ratios and Altman-Z Score as a financial performance indicator is
often underestimated. Related to this, incorporation with its counterparts in developed and
developing countries, the environment under which selected grade one construction companies are
obtained financial performance evaluation and distress prediction is quite considered.
Description
Keywords
Building Contractors, Financial Performance, Financial distress