The Impact of Financial Distress on Financial Performance: Evidence from Listed Licensed Finance Companies in Sri Lanka

In the ever-changing world of financial markets, the intersection between financial distress and performance is important. Financial distress, an entity's inability to satisfy its financial obligations, can seriously affect a company or individual's market value and stability. Sri Lanka's financial sector has recently faced difficulties, with certain institutions failing due to insolvency or regulatory noncompliance. The research intends to give significant insights to stakeholders, regulators, and investors in the Sri Lankan finance industry by utilizing Altman's Z-score model. This study examines the relationship between financial distress and financial performance in 22 licensed finance institutions in Sri Lanka from 2013 to 2022. The study's independent variable is financial distress, measured by Altman’s Z’Score model, and the dependent variable is financial performance, measured by Return on Assets (ROA) & Return on Equity (ROE). Descriptive analysis, Correlation analysis and panel data regression were used to analyze the data in the study. The study supported that financial distress significantly impacts the ROA and ROE which are considered as financial performance measurements. The higher distress firms showed a lower performance during the period. The main indication given where companies should focus on the distress of the company can be analyzed through the Altmans Z score model. Licensed finance companies can have proactive measurements to enhance the liquidity reserves and optimize the capital structure of the firm. The findings are significantly important for the management of Licensed finance companies in Sri Lanka to manage their future strategies. The study's result indicates a significant impact of financial distress on the financial performance of listed licensed finance companies in Sri Lanka.