Predicting business failure in the hotel industry: the case of Kenya Tourist Development Corporation hotels

Abstract

Using financial distress models to predict failure in advance is for most businesses absolutely essential in their decision making process. Hence, this study involved a critical investigation in the applicability of the Altman (1968) Z -score models in predicting financial distress in hotels owned by Kenya Tourist Development Company. Testing the model in Kenyan context was important to determine the practical applicability and relevance of the model. The main objective of the study was to test the Altman model in determining practical predictive ability of failure in selected hotel companies. The sample companies were 10 failed and 20 nonfailed hotel companies owned by KTDC from 1999 to 2003. The study employed an analysis of financial statements and derived the Z-score of the sampled companies to test the predictive ability of the models in forecasting bankruptcy. The analysis utilized ratios, which are related to the model in the study. The results reported in the empirical study for total failed and nonfailed sample companies shows that the model is able to predict failure and non-failure amongst Kenyan companies in hotel industry. Therefore, the study concluded that the Altman bankruptcy prediction model is justifiable to be applied to predict bankruptcy in Kenyan hotel industry. Hence, it is advisable to use these models in predicting failure in the nonmanufacturing firms, especially in Kenyan context.