Enlightening the critical factors affecting the solvency of Indian construction industry: An empirical analysis using multivariate discriminant analysis and logistic regression

The present research work aimed to examine the vital factors that affect the solvency of the Indian construction sector. The two different parameters of solvency, namely, debt to total assets (DTA) and cash flow to total liabilities (CFTL), were used in the present study. These two solvency indicators were categorized using zero and one numerical values. One indicates financially sound companies, and zero indicates weak companies with poor solvency ratios. The different financial ratios, namely, profitability, liquidity, leverages, and turnovers, were used as predictors or explanatory variables of insolvency of Indian construction companies. The study employs multivariate discriminant analysis (MDA) and binary logistic regression to predict the factors accountable for the insolvency of the Indian construction sector. The empirical findings of MDA and logistic regression show significant discrimination in the solvency position of construction companies according to their different financial performance parameters, namely, profitability, liquidity, and leverage. The empirical findings suggest that in the first case, the critical indicators predicting solvency are turnover, liquidity, and leverage ratios. In the second measure of solvency (CFTL), profitability significantly discriminates solvency of companies. Overall, the findings of MDA and logistic regression are consistent with each other. The outcomes of the study will be helpful to policymakers' different stakeholders.