THE IMPACT OF FINANCIAL DISTRESS ON THE FINANCIAL PERFORMANCE OF COMPANIES: EVALUATION THROUGH STANDARD & POOR’S SRI LANKA 20 INDEX (S&P SL20)

Abstract

"This study investigates the impact of financial distress on the financial performance of companies listed in the Standard & Poor’s Sri Lanka 20 (S&P SL20) Index from 2020-2024; a timeframe marked by significant economic turbulence, including the COVID-19 pandemic and Sri Lanka’s unprecedented sovereign debt crisis: quantitative research approach and secondary financial data used for the analysis. The study employs the revised Altman Z- score and Ohlson O-score models to measure financial distress, while Return on Assets (ROA) and Return on Equity (ROE) serve as indicators of corporate financial performance. The research explores the extent of financial distress experienced by these top-tier firms, its influence on key performance metrics, and sectoral variations within the index. Findings highlight the substantial negative impact of financial distress on profitability and operational efficiency, underscoring the vulnerabilities of even the largest Sri Lankan companies amid macroeconomic shocks. The study contributes to the limited empirical literature on corporate distress in emerging markets. It provides valuable insights for policymakers, investors, and corporate leaders aiming to enhance resilience and informed decision-making in volatile economic environments.