A financial ratio-based predicting model for hotel business failure

Abstract

The purposes of this study were to find financial ratios that uniquely characterize failed hotel firms, and develop a multiple discriminant model which can predict business failure in the Korean hotel industry. Nine financial ratios that classify 86 hotel firms into failed and non-failed groups were identified. Of these nine ratios, two, including debt ratio and fixed assets turnover ratio, were extracted and their prediction accuracy in terms of hit ratio was 91.9%. The model suggests that debt-burdened firms with low fixed asset turnover ratio are more likely to fail. It means that a prudent debt financing policy is necessary to avoid business failure and fixed assets must be used effectively in order to maintain a viable enterprise. Prediction models for business failure are not homogeneous across all countries. Hotel investors and creditors can benefit from the model in screening out failing firms and lowering their investment risk.