Financial Performance Evaluation And Distress Prediction Model Of Selected Grade One Building Contractors

One of the main problem for evaluation of financial performance of Ethiopian construction industryrnparticipants are accepting high working capital and revenue for the lowest bid. But it does notrnguarantee for the performance of a construction company. This is reason why the study sets mainrnobjective to compare and examine the performance and distress of selected grade one buildingrncontractors in Ethiopia. As part of the approach to achieve this objective, the study first developedrnindustry average through desk study to evaluate the selected Grade-1 building contractor’s financialrnperformance. It identified by liquidity, profitability, operational efficiency and solvency ratios.rnThen the study used the concept associated with these basic pillars, both to notify the analysis andrnserve as a reference against which the selected grade one contractor’s financial ratios are compared. rnThe study adopted case study research methodology whereby five Grade 1 building contractors thatrnare registered under the Ministry of Urban Development, Housing and Construction are taken asrncase in point. Moreover, the researcher requires that the financial statements submitted by privaterncompanies comply with Generally Accepted Accounting Principles (GAAP). And the accessibilityrnof accounting statements has taken as a criterion. It employed data collected from documents andrnthrough interviews. Based on this, a detailed analysis has been conducted to indicate constructionrnfirm’s performance using Return on Asset (ROA) and Return on Equity (ROE) as a dependentrnvariable and Altman Z Score, Gross Profit Margin Ration (GPMR), and Total Debt to Equity Ratiornare as independent variables. rnThe study found out that Altman Z-Score distress prediction model was found to have the highestrnaccuracy in predicting the distresses of the studied construction firms among the others predictionrnmodels (Springate and Zmijewski models). rnAs a result, the outcomes of the correlation coefficient analysis, and ANOVA F-test in multiplernregression analysis, the following conclusions were made: rn1) The correlation analysis indicates that Altman Z score and GPMR have a positive relationshiprnwith both of ROA and ROE, while the Debt to Equity ratio has a negative relationship with ROArnand a positive relationship with ROE; 2) The regression results show that, financial distress has arnsignificant impact to the firm’s financial performance; 3) Financial performance prediction modelrnresults show that Altman-Z Score is robust in explaining both ROE and ROA. While, the majorityrnof the firm’s profit has been generated by debt, ROE will no longer used as an indicator of financialrnperformance. rnTherefore, a crucial implication of the findings is the trend of application of liquidity, profitability,rnoperational efficiency, solvency ratios and Altman-Z Score as a financial performance indicator isrnoften underestimated. Related to this, incorporation with its counterparts in developed andrndeveloping countries, the environment under which selected grade one construction companies arernobtained financial performance evaluation and distress prediction is quite considered.

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