Description
Financial Distress, Restructuring And Turnaround Evidence From Thai Smes
Rangsit Journal of Arts and Sciences, July-December 2012 RJAS Vol. 2 No. 2, pp. 119-132
Copyright © 2011, Rangsit University
119
Financial distress, restructuring and turnaround: evidence from Thai SMEs
Kanitsorn Terdpaopong
1*
and Omar Al Farooque
2
1
Faculty of Accountancy, Rangsit University, Patumthani 12000, Thailand
Email: [email protected]
2
UNE Business School, Faculty of the Professions
University of New England, 2352 Australia
Email: [email protected]
*
Corresponding author
Submitted 4 March 2012; accepted in final form 19 November 2012
____________________________________________________________________________________________________________
Abstract
This study examines firstly whether there are significant differences in the financial characteristics of financially
distressed and non-distressed SMEs in Thailand, and secondly, whether distressed SMEs can quickly turnaround once they
enter into the court directed restructuring process. Building on both parametric and non-parametric tests and a good number
of sample SMEs in both groups of firms, it provides evidence that the Thai financially distressed SMEs are significantly
different from their non-distressed counterparts in terms of profitability, liquidity and leverage. Again, for the distressed
SMEs that have entered into the court process of restructuring, turnaround is seemed to be a longer-term phenomenon rather
than short-term, as the findings show weak signs of improvement in the financials of interest except a few. This implies that
financial recovery and performance do not happen as quickly as expected after restructuring. These findings of the study
have implications for an emerging economy such as Thailand for providing continued support and assistance that can ensure
speedy financial recovery of distressed SMEs as well as insure the positive effect of being financially restructured firms for
the economy.
Keywords: financial characteristics, Thai distressed and non-distressed SMEs, turnaround, restructuring
________________________________________________________________________________________________
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??????????????? ????????????????????????????????????????? (SMEs) ??????????? ???????????? ?? ??? ????? ??????????? ????????? ??? ??????? ?? ?
SMEs ??? ????????????????? ???????????????????????????????????????? ??????????????????????????????????????????????????? ????????
????????????? ??????????? ?????????????????????? ????????????????????????????? ? SMEs ????? ???????? ???? ?? ?? ??????????? ???? ? ?? ??? ? SMEs
?????????????????????? ??? ?? ??? ????????????? ???? ????? ????? ???? ?? ?? ??? ?????? ??? ? SMEs ??? ??? ?? ?? ???????????? ????????????? ????????? ?? ???
????????? ?????????????????????????? ????????????? SMEs ??? ?? ?? ???????????? ????? ???? ???? ???????????? ???????? ?????? ?? ????????? ?????? ??? ?
??????????????????????????? ?????????????????? ??????????????????????????????????????????? ?????????????????? ???????????????????????
????? ??? ????????? ???? ?????????? ?? ????? ?????? ??? ???? ?? ????? ???????????? ???? ??????? ??????????????? ?????? ?????????? ?????????????? ??? ???
?????????????????????? ????????? ?????????????????? ??????????????????????????????????????????????? ????????????????? ?????? ?????? ??
????????? ??????????????????????? ?????????????????????????????? SMEs ?????????? ???????????????????????????????????????????
???????: ???????????????????, ?????? SMEs ??????????????????????????, ???????????, ????????????????????
__________________________________________________________________________________________
1. Introduction
Business failure is not uncommon across
the globe, it rather becomes a recurring event despite
the fact that the factors, both internal and external to
the firm, that lead a business to failure, may vary
across countries. It is perceived that numerous
internal factors including ineffectiveness of
management, cost inefficiency, poor employee
productivity, etc. is directly attributable to the firm’s
financial distress and bankruptcy. However, often
some external factors such as economic recession,
high interest rates, inflation, government regulation,
etc. could contribute to a firm’s liquidation that is
beyond the control of a firm. Charalambous (2004)
contends that in the past two decades, business
failures have occurred at higher rates than at any
TERDPAOPONG & FAROOQUE
120
other time since the early 1930s. The failure of a
business has severe economic consequences and
substantial costs, both financial and psychological, to
numerous parties involved. The economic cost of
business failures are significant in terms of both
direct and indirect effects that include among others
the expenses of either liquidating or attempting to
restructure the internal financial domain of the
business, accounting and legal fees and other
professional service costs that resulted due to the
crisis.
It is conceivable that ‘financial distress’ of a
firm ultimately leads to insolvency and business
failure. Lee and Yeh (2004) identified a firm as
financially distressed when: a) it defaults on loan
repayments, b) its net worth falls below half of its
stock, c) it engages in loan term negotiations.
Asquith, Robert, and Scharfstein (1994) identified an
unhealthy firm if in any two consecutive years, the
firm’s earnings before interest, tax, depreciation and
amortization are less than 80% of its interest
expense. Again, Elloumi and Gueyle (2001)
classified a financially distressed firm if the firm has
experienced negative earnings per share
consecutively for 5 years. Wruck (1990) classified a
firm as being financially distressed when its cash
flows are not sufficient to cover its current
obligations. Whitaker (1999) contended a firm being
in financial distress when cash flows are less than the
current maturities of long-term debt. They imply that
poor financial performance is the root cause of a firm
falling into financial distressed.
In the business world, ‘turnaround’ is used
when poor financial performance of a firm
experiences a positive reversal. Schendel, Patton,
and Riggs (1976), Bibeault (1982), Hambrick and
Schecter (1983) and Robbins and Pearce (1992)
defined turnaround as performance decline followed
by performance improvement. Turnaround strategies
denotes to implementing changes in the internal
management of a failing firm. Turnaround strategies
typically include retrenchment, repositioning and
reorganization etc. which management can use in
overcoming the organizational decline (Hambrick &
Schecter, 1983; Pearce & Robbins, 1993;
Arogyaswamy, Barker, & Yasai-Ardekani, 1995).
Retrenchment, repositioning and reorganization are
broadly recognized as ‘restructuring’. Retrenchment
refers to reduction in the size and scope of a
business. It includes quitting difficult markets or part
of the business that is unproductive and unprofitable,
downsizing, disposing of assets etc. that can control
further financial losses and generate additional
resources for future profitability. Reorganization
includes new structures, human resource
management, replacement of top executives etc. and
repositioning emphasizes on growth that includes
finding new markets, seeking new resources, or new
products to generate more revenue. The restructuring
attempts that lead to turnaround are pursued
differently in different firms based on their needs and
managerial judgment.
Financial insolvency is one of the most
significant threats for many businesses in Thailand
since the economic crisis in 1997. Many businesses
in Thailand have become bankrupt that resulted in a
chain-effect to other associated and connected
businesses. As business collapse occurs, Small and
Medium Enterprises (SMEs) have been seen as one
of the key engines to sustain economic growth in
Thailand. Although business failure were studied
widely for big enterprises to identify the signs or
early detection symptoms that lead to potential
business failure or developing financial difficulty,
Thai SME sector has not received sufficient research
attention despite the recent trend of emphasis on
SMEs (Bàkiewicz, 2005). Therefore, this study aims
to fill this gap in the literature regarding Thai small
and medium-sized enterprises and their financial
restructuring. The purpose of the study is twofold,
firstly to distinguish the similarities or differences
between financially distressed SMEs and financially
non-distressed SMEs in Thailand with respect to
their financials such as liquidity, financial leverage
and profitability; secondly to analyze the turnaround
of financially distressed SMEs one year after the
insolvency (i.e. being in the Central Bankruptcy
Courts in Thailand) in terms of their financials.
The remainder of the paper is as follows:
Section 2 discusses literature briefly while Section 3
focuses on the Thai context of SMEs and their
restructuring. Section 4 provides data and hypotheses
of the study and Sections 5 discusses on research
method. Finally, Section 6 concludes the findings
and implications therein.
2. Literature Review
SMEs are identified in a number of ways
considering different aspects of the internal
structures of the businesses. The size of total assets,
amount of fixed assets, total assets in the balance
sheets, total sale volume or some combination of
these factors has mostly been employed to identify
SMEs. However, the number of employees is
RJAS Vol. 2 No. 2 Jul.-Dec. 2012, pp. 119-132
121
considered to be the most frequently identifying
factor used in many countries (Asian Productivity
Organization; Storey, 1994). For instance, the
definition of the European Commission states that
small and medium-sized enterprises are firms that
employ less than two hundred and fifty staff and
have an annual turnover not exceeding €50 million
or an annual balance sheet total not exceeding €43
million (European Commission, 2003). The
definition of SME as used by the new Basal Capital
Accord considered those businesses with a sales
volume of less than US$65 million as SMEs (Altman
& Sabato, 2007). In the USA businesses are
classified as very small enterprises if they employ
less than twenty staff, small enterprises if they
employ less than one hundred staff, and medium
enterprises if they employ less than five hundred
employees (Office of Advocacy, 1984). Within the
manufacturing business sector of Australia, small
enterprises are those that employ less than one
hundred staff with medium enterprises being those
firms that employ less than two hundred staff
(Holmes & Kent, 1991; Meredith, 1982). The nations
of China, Indonesia, Japan, Korea, Malaysia, and
Singapore also utilized the number of employees as
the basis for the classification of firms, however with
different levels of employment size as cut off points
(Khader & Gupta, 2002). Thus, it can be argued that
where both categories of the value of fixed assets
and the number of employees are placed, the firm is
either a small or a medium one; the lower of the two
will determine how the enterprise should be
classified (Institute for Small and Medium
Enterprises Development, 2006)
A considerable number of studies have
focused largely on the incidence of bankruptcy in
various settings. There has been advanced empirical
research attempting to develop models using the
financial data of firms that appear successful and
those firms that fail or become bankrupt, such as the
research by Beaver (1966), Altman (1968, 1983,
1993, 2007), Deakin (1972, 1976), Edmister (1972),
Berryman (1982), Fulmer, Moon, Gavin and Ervin
(1984). However, very little research has been
undertaken on financial distress probability of the
firm, in particular focusing on SMEs. Moreover little
attention has been paid to creating a model to
calculate the credit risk for SMEs (Altman & Sabato
2007; Altman, Sabato, and Wilson, 2008). Such
study is warranted to predict the failure of SMEs as
SMEs tend to exhibit risk characteristics that differ
from those of large corporations (Chan & Chen,
1991; Holmes & Kent, 1991; Hutchinson &
Michaelas, 2000; Walker & Petty, 1978). Of
particular interest is predicting business failure,
which has been a major concern of researchers for
several decades (Ahn, Cho & Kim, 2000). While
the study of business stability has been the major
focus of many researchers (Altman & Sabato, 2007;
Altman, Sabato, & Wilson, 2008), some researches
focus on identifying financial characteristics of
SMEs (for example, Dennis, 1993; English, 2001;
Hall, Hutchinson, & Michaelas, 2000; Hatten,
1997; Holmes, Hutchinson, Forsaith, Gibson, &
McMahon, 2003; Holmes & Zimmer, 1994; Huang
& Brown, 2000; Hutchinson, Meric, & Meric,
1988; McMahon, Holmes, Hutchinson, & Forsaith
1993; Chittenden, Hall, & Hutchinson, 1996), while
others concentrate on the financial characteristics
of large corporates (such as, Bei and Liu, 2005;
Chan & Chen, 1991; Holmes & Kent, 1990; Shu-e
& Li, 2005; Walker & Petty, 1978).
With considerable economic significance of
SMEs the need to understand the underlying reasons
for SME failure has attracted research attention in
recent times. Of further interest is the need for the
comprehension of the difficulties required to be
successfully solvent and the measures to be
employed and their outcomes during the
restructuring process to enhance the financial
stability of the business. This study will, thus, shed
light on financial distress of Thai SMEs and their
subsequent restructuring and turnaround atmosphere
through analyzing relevant financial characteristics
of selected SMEs. This study is particularly
concerned on the firms that have gone through the
court-supervised restructuring process, so the SMEs
that filed a petition with the Central Bankruptcy
Court during 2002–2005 for corporate restructuring
have been selected.
3. Thai Context of SMEs and Their Restructuring
Process
SMEs are fundamental units of the Thai
economy, constituting over 99 per cent of the total
number of enterprises in the country (Office of
SMEs Promotion 2007). In Thailand, SMEs are
categorized by three major features: production,
service and trading and they are classified as small or
medium enterprises through the amount of fixed
assets, excluding land, and the number of employees
(see Table 1).
TERDPAOPONG & FAROOQUE
122
Table 1 Size Classification of Small and Medium Enterprises in Thailand
Sector
Small Enterprise Medium Enterprise
Employment
(no. of people)
Fixed assets
(Million Baht)
Employment
(no. of people)
Fixed assets
(Million Baht)
Production ? 50 ? 50 51 - 200 > 50-200
Service ?50 ? 50 51 - 200 > 50-200
Trading:
Wholesale ?25 ? 50 26-50 > 50-100
Retail ?15 ? 30 16-30 > 30-60
Source: Institute for Small and Medium Enterprises Development (2006)
The importance of SMEs in job creation
and stimulating economic growth has been
recognized (Bàkiewicz, 2005; Veskaisri, 2007). As a
result of this recognition, the issue of sustainability
of SMEs has been getting momentum as a significant
factor in the development of government policies.
Although Thai Government has implemented
policies to enhance the capability of SMEs, the
problem of SMEs potential failure still persists. The
committee for the Promotion of SMEs summarized
the obstacles faced by Thai SMEs in four main
categories: limited financial access, the loss of
competitive advantage, the lack of good corporate
governance, and ineffective support from the
government (Office of SMEs Promotion 2006 and
2007). The financial aspect of SMEs failure has
attracted particular policy attention in Thailand since
the financial crisis of 1997. At this time, the
percentage of non-performing loans (NPLs) to total
credits of the country’s financial system hit 47.7 per
cent, which is the highest in the history of the
country (Bank of Thailand 2008). This crisis
triggered the Government’s greater concern for
economic recovery and growth (Bàkiewicz, 2005;
Swierczek & Ha, 2003). The Thailand Ninth
National Economic and Social Development Plan
(2001–2006) (Thai 9
th
NESDP; Office of The
National Economic and Social Development Board
2001) emphasized the concern for economic
development, which promoted and encouraged a
focus on SMEs development. The Thai Government,
through the Office of SMEs Promotion (OSMEP),
formulated the 1
st
SMEs Promotion Plan (2002-
2006) that aimed at resolving the effects of the
economic crisis and supporting the revival of SMEs.
Restructuring Process
In Thailand, stressed assets are seen as non-
performing loans (NPLs) on the financial statements
of the Thai financial institutions. The number of
NPLs has substantially increased since the 1997
economic crisis; this has resulted in numerous
corporate failures and a record number of NPLs in
the financial system (Vongvipanond, 2004).
Corporate financial restructuring is the preferred way
used to satisfy both debtors and creditors. Such
restructuring involves substantial changes in a
company’s financial structure or ownership and
control, and possibly the internal business portfolio
with the intention of increasing the value of the firm.
The proper restructuring of stressed assets and
liabilities may allow potentially successful
companies to continue their business activities and
survive the financial crisis (Giddy, 2010).
There are two methods available for
pursuing the restructuring process in Thailand since
its introduction into the Thai economy: (i) out-of-
court restructuring and (ii) court-supervised
restructuring (Bank of Thailand, 2001; Dasri, 2001).
There are several organizations involved in the out-
of-court process to assist the distressed firms to
financially recover such as the informal restructuring
within financial institutions, the Corporate Debt
Restructuring Advisory Committee (CDRAC), the
SET-Rehabco Restructuring as established by the
Stock Exchange of Thailand (SET) and the asset-
management companies (AMCs) (Dasri, 2005;
Rroude, 2005). However, highly distressed firms
may require more complex restructuring methods
offered through the court process rather than the out-
of-court procedures. Once the Court approves the
petition, the process of restructuring then takes place.
The method that is frequently used in the debt
restructuring process, in both out-of-court and court-
supervised restructuring processes, is a combination
of a number of alternatives, such as the extension of
the loan period with or without a grace period for the
RJAS Vol. 2 No. 2 Jul.-Dec. 2012, pp. 119-132
123
principal or interest and/or debt forgiveness. This can
also include the conversion of debt to equity through
the transfer of the debt burden to an affiliated
company, the conversion of the debt to convertible
debenture and the transfer of other assets such as
investment capital, claims on debtors, zero coupon
bonds, office buildings, real estate, machinery,
houses, and golf courses to an affiliated company.
The distressed firms may also receive a continuation
of their current credit line or a credit guarantee. The
restructuring plans, such as the extension of a loan
period in which some of the obligations are
extended, ensure that businesses have a greater or
increased cash flow, and in case that restructuring
had been offered exemption of an interest expense
with a grace period of between 1-3 years, or debt
forgiveness in some portions of total debts, which
further enhances cash flow into the businesses and
enables the businesses to pay financial obligations as
they come due. Together with having a normal credit
line or increasing the credit line ensures that the
business continues growing, and eventually
regaining financial success. However, if the court
does not approve the restructuring plan or terminates
the reorganization, with orders of absolute
receivership, the debtor undergoes bankruptcy
procedures. The successful implementation of the
restructuring process has been the major key to assist
businesses to return to normal financial activity.
4. Hypotheses and Data
In this study, the term ‘financially
distressed firm’ is used to refer to businesses that
were involved in the Central Bankruptcy Court
actions such as internal reorganization, financial re-
arrangement or receivership, or the firms that were
unable to pay their financial obligations as they
mature. The characteristics of such financially
distressed firms are (i) firms showing low liquidities
with their current liabilities greater than their current
assets, (ii) firms with high debts, where their total
liabilities greater than their total assets or firms with
negative equities, (iii) firms having low or negative
profitability by the end of their financial year. It also
employed the use of financial ratios to distinguish
between the two focus groups of firms, financially
distressed and non-distressed firms, and to examine
the turnaround performance of restructuring in the
distressed firms. It is thus worthwhile to examine the
financials of both groups of firms with respect to
three different categories of liquidity, leverage and
profitability. The following hypotheses are set for the
research purpose.
H
1
: There are significant differences in financial ratios between the Thai financially distressed
and financially non-distressed SMEs. That is,
H
1.1
: Liquidity of the Thai financially distressed SMEs is less than that of
non- financially distressed SMEs.
H
1.2
: Financial leverage of the Thai financially distressed SMEs is greater than that of
non- financially distressed SMEs.
H
1.3
: Profitability of the Thai financially distressed SMEs is less than that of non-
financially distressed SMEs.
H
2
: After the restructuring, there is significant improvement in financial ratios in
the Thai turnaround SMEs who were in financial distress in terms of liquidity, leverage and
profitability. That is,
H
2.1
: Liquidity of the Thai turnaround SMEs increases after the restructuring.
H
2.2
: Financial leverage of the Thai turnaround SMEs decreases after the restructuring.
H
2.3
: Profitability of the Thai turnaround SMEs increases after the restructuring.
TERDPAOPONG & FAROOQUE
124
In regards to the first hypothesis, it is
anticipated that financially distressed SMEs are
significantly different from that of financially non-
distressed SMEs. As the distressed SMEs are facing
financial difficulty, it is expected that they would
have less liquidity and profitability and high leverage
compared to non-distressed SMEs. The second
hypothesis relates to the changes over time as the
financially distressed SMEs go through the court
guided restructuring process. By taking the financial
ratios of companies for base year and one year after
the restructuring, it is expected that there is an
increase in their liquidity and profitability and a
decrease in financial leverage in the post-
restructuring period as compared to the pre-
restructuring period.
The samples of financially distressed firms
in this study were selected from firms that went
through the Central Bankruptcy Courts (CBC),
Thailand during 2002–2005 periods. It is
conceivable that all the firms going through the
courts would have the status of a non-performing
loan (NPL) at the time of entering the court
procedure for restructuring. The firms being selected
for this study were showing low liquidities, low
profitability, and high debts at the time they went to
the courts for restructuring. However, the future of
these firms, whether it is a business collapse or
financial failure or bankruptcy, depended on the
progress of their restructuring of loans and plans for
improving their financial performance and success in
other related factors. Again, the criteria chosen to
classify the size of the business was the asset size
gained from the consideration of the balance sheets
together with considering the recommendation of the
European Commission that the annual balance sheet
(or total assets) of enterprises should not exceed €43
million (or THB 2,000 million (x-rate.com, 2006))
being classified as small and medium-size
enterprises (European Commission 2003). This
chosen criteria is also consistent with the information
of the Market for Alternative Investment (MAI)
listed companies which are considered as Thai
medium-sized enterprises, with each company not
having a total amount of assets on the balance sheet
over THB 2,000 million (Market for Alternative
Investment 2007). Therefore, in this study, the
business with an asset size THB 2,000 million or less
is classified as small and medium.
Following the above criteria, the list of the
distressed firms was obtained from the website of the
Legal Execution Department, Ministry of Justice,
Thailand (http://www.led.go.th). The financial
statements were then obtained from the website of
the Department of Business Development (DBD),
the former Ministry of Commerce, Thailand
(http://www.dbd.go.th). In total the financial data is
gained from the balance sheets and income
statements of 68 financially distressed companies
that went into the Central Bankruptcy Court during
the period 2002–2005 for restructuring. Similarly,
financial data of 191 financially non-distressed firms
were obtained directly through the website of the
DBD for the same period. Both 68 financially
distressed and 191 non-distressed SMEs constitute
the gross sample size of this study totaling 259
SMEs. However, this unadjusted data (including all
outliers) is later trimmed by excluding outliers from
both groups of firms, which leaves the final sample
as 42 financially distressed, 174 financially non-
distressed SMEs to a total of 216 SMEs.
5. Research Method
In regards to variable selection and
methodology applied, this study provides an analysis
of financial ratios to enhance the ability to
differentiate the financial characteristics of
financially distressed from non-distressed Thai
SMEs as well as examine the changes over time of
the distressed firms’ financial ratios of base year and
one year after being in the court, using 0.05 at the
significance level. A comparative statistical
description of eight variables is used in this paper for
distressed and non-distressed firms. Both parametric
(independent and dependent paired sample T-test)
and non-parametric (Mann-Whitney U test and
Wilcoxon signed rank test) methods are used to
analyze the eight variables in order to find the
significant differences between the two sample
groups. Since the variables do not show normal
distribution, the non-parametric approach using the
Mann-Whitney U Test is considered the best
approach to record the similarities and/or differences
of financially distressed and non-distressed SMEs.
Similarly, the nonparametric method, the Wilcoxon
Signed Rank Test, is used and considered the best fit
to observe the changes over time in distressed firms
between their base year of court proceedings for
restructuring and one year after being in court
procedures.
Table 2 presents selected variables for the
analysis and comparison between the financially
distressed and non-distressed firms, and between the
distressed firms with a lag of 1 year from their base
RJAS Vol. 2 No. 2 Jul.-Dec. 2012, pp. 119-132
125
year of court proceedings for restructuring. These
independent variables are most commonly used by
previous studies, which may be divided into three
categories: 1) Liquidity, 2) Leverage and 3) Profitability.
Table 2 Variable Definition
Variables Calculated as:
Measures of liquidity:
1. Current assets to total assets ratio
(CATA)
The amount of cash, account receivables, bills, inventory and other current
assets as a percentage of total assets.
2. Current liability to total assets ratio
(CLTA)
The amount of account payables, and other short-term liability as a percentage
of total assets.
3. Working capital to total assets ratio
(WCTA)
The current assets less current liability as a percentage of total assets.
Measures of financial leverage:
1. Long-term liability to total assets ratio
(LLTA)
The amount of long-term liabilities as a percentage of total assets.
2. Total liability to total assets ratio
(TLTA)
The amount of short-term and long-term liabilities as a percentage of total
assets.
3. Debt to equity ratio (DE) The amount of debt divided by equity.
Measures of profitability:
1. Earnings before interest and tax
expenses to total assets ratio (EBITTA)
All earnings before interest and tax expenses as a percentage of total assets.
2. Earnings after interest and tax expenses
to total assets ratio (EAITTA)
All earnings after interest and tax expenses as a percentage of total assets.
6. Empirical Results and Discussion
Table 3 documents the comparisons
between distressed and non-distressed SMEs for the
adjusted sample (outliers excluded) of 42 and 174
firms, respectively. It reveals high level of
satisfactory liquidity ratios of non-distressed SMEs
as compared to the distressed firms, which are more
than double in the former firms than the latter firms.
The average of CATA ratio is 73.67 for non-
distressed SMEs and 40.71 for distressed SMEs.
Similarly, WCTA ratio is 35.54 for non-distressed
firms and -46.78 for distressed ones. Also CLTA
ration is 38.13 for the former and 87.49 for the latter.
All these ratios indicate significant differences
between distressed and non-distressed firms as
reflected in their financials. As expected,
profitability ratios of non-distressed SMEs are
positive against negative ratios for distressed SMEs.
EBITTA and EAITTA ratios are 13.24 and 8.88
respectively for the former while -12.14 and -28.38
for the latter. Such levels can explain the extensity of
financial distress of the negative profit-earning firms
in Thailand when compared with their counterpart in
financially solvent firms. Likewise, the same pattern
is reflected in leverage ratios for both groups of
firms and the high level of ratios for distressed firms
than non-distressed. Debt-equity ratio is negative for
distressed firms (-3.13) but positive for non-
distressed firms (1.64). Both total liability and long-
term liability to total asset ratios are exceptionally
high in distressed firms, 160.53 and 73.04
respectively. These ratios are 46.62 and 8.49, in non-
distressed firms respectively. Overall, differences in
liquidity ratios are huge between both groups of
firms that explicitly explain the circumstances that
each group is facing in Thailand.
TERDPAOPONG & FAROOQUE
126
Table 3 Descriptive Statistics of Thai Financially Distressed and Non-distressed SMEs
Non-distressed SMEs Distressed SMEs
Variable Mean
Standard
Deviation
Mean Standard Deviation
Liquidity
1) CATA
2) CLTA
3) WCTA
73.6716 22.4105 40.7107 27.4344
38.1278 24.8029 87.4880 61.2530
35.5440 21.9308 -46.7774 65.4858
Leverage
4) LLTA
5) TLTA
6) DE
8.4876 16.0430 73.0424 68.0272
46.6151 25.5493 160.5304 54.4584
1.6466 1.9827 -3.1303 5.9675
Profitability
7) EBITTA
8) EAITTA
13.2424 9.1235 -12.1419 44.9312
8.8759 6.6189 -28.3778 63.8593
Number of sample: 174 Non-Financially distressed SMEs
: 42 Financially distressed SMEs
Table 4 provides comparison of
financially distressed SMEs between their base
year of court procedures for restructuring and one
year after going to the court. It is documented that
five out of eight variables have improved after
being in court restructuring process. In particular,
both liquidity and profitability ratios show
significant change as compared to their levels in
base year. Among the liquidity rations, both CLTA
and WCTA ratios improved from 87.49 to 72.04
and -46.78 to -31.32, respectively. CATA ratio
remains in the same level. Similarly, profitability
ratios EBITTA and EAITTA improved from,
-12.14 to 15.14 and -28.38 to 7.64, respectively. Of
the leverage ratios, only debt-equity ratio has made
progress from -3.13 to -2.19, while other two ratios
(i.e. LLTA and TLTA) have deteriorated from their
previous levels. While such deterioration of
leverage ratios is not surprising during the period
of restructuring process, other ratios indicate
performance improvement in terms of profitability
and liquidity. These results signify the
effectiveness of court directed restructuring
process of SMEs in Thailand to get rid of financial
distress and in some cases bail them out from
severe financial difficulties and poor performance.
Table 4 Descriptive Statistics of Financially Distressed SMEs base-year and 1-year after
the Court Directed Restructuring process
Variable
Base year
of the court process
One year AFTER
the court process
Mean
Standard
Deviation
Mean
Standard
Deviation
Liquidity
1) CATA
2) CLTA
3) WCTA
Leverage
4) LLTA
5) TLTA
6) DE
Profitability
7) EBITTA
8) EAITTA
40.7107 27.4344 40.7146 29.4819
87.4880 61.2530 72.0375 87.1358
-46.7774 65.4858 -31.3229 99.0346
73.0424 68.0272 94.8063 85.4017
160.5304 54.4584 166.8438 91.4711
-3.1303 5.9675 -2.1910 4.0283
-2.6290 17.5845 15.1387 52.0591
-9.5674 18.1872 7.6441 57.9067
Number of sample: 42 Financially distressed SMEs in base year of being in the court
: 42 Financially distressed SMEs one year AFTER being in the court
RJAS Vol. 2 No. 2 Jul.-Dec. 2012, pp. 119-132
127
Table 5 denotes comparative results of the
financial ratios of financially distressed and non-
distressed SMEs following parametric T test and
non-parametric Mann-Whitney U Test. Given that
the latter test is more reliable than the former in the
sample of not normally distributed for both groups of
firms, both tests show that for liquidity, leverage and
profitability ratios, there is a statistically significant
difference within each variable in interest, a total of
eight variables. The characteristics of the financially
distressed SMEs are shown to be having low
liquidity, high leverage and low profitability while
the non-distressed SMEs demonstrate a sound
financial profile in the opposite direction having high
liquidity, low leverage and high profitability. All
eight variables show significant difference between
financially distressed and non-distressed SMEs in
both parametric and non-parametric tests. Therefore,
the first hypothesis of the study including all sub-
hypotheses (H
1.1
, H
1.2
, and H1.3) is accepted.
Table 5 The Comparative Result of Financially Distressed and Non-distressed SMEs
Variable
Parametric
Independent Paired Sample T-Test
Nonparametric
Mann-Whitney U Test
Unadjusted data Adjusted data Unadjusted data
Sig.
(2-tailed)
Result
Sig.
(2-tailed)
Result
Asymp. Sig.
(2-tailed)
Result
Liquidity
1) CATA .000 *** .000 *** .000 ***
2) CLTA .000 *** .000 *** .000 ***
3) WCTA .000 *** .000 *** .000 ***
Leverage
4) LLTA .000 *** .000 *** .000 ***
5) TLTA .000 *** .000 *** .000 ***
6) DE
Profitability
7) EBITTA .000 *** .000 *** .000 ***
8) EAITTA .000 *** .000 *** .000 ***
*** Significant at .1% level (0.001)
Table 6 reports comparative results of
financially distressed SMEs between their base year
of the court process of restructuring and one year
after the court process to indicate whether distressed
firms could be able to turnaround from financial
difficulties by showing satisfactory performance in
their liquidity, profitability and leverage, etc. As the
restructuring process has been implemented though
the court process, the overall performance of
distressed firms is expected to improve such as an
increase in liquidity ratios along with profitability
and decrease in leverage ratios. Contrary to expectation,
both parametric T test and non-parametric Wilcoxon
ranked Test in Table 6 provides inconsistent
findings. While parametric test indicates no
significant change in the financial ratios of liquidity,
profitability and leverage in the distressed SMEs
between their base year of the court process of
restructuring and one year after the court process,
non-parametric test shows significant change in
profitability ratios and debt-equity ratio only. Two of
the three liquidity ratios show a weak level of
significant change at 10% significance level. This
implies that the court process does not improve the
liquidity of distressed firms as per expectation; thus
sub-hypothesis
2.1
is partially accepted. Similarly, two of
the three leverage ratios reveal no significant
changes between the base year and the year after
being in court; thus sub-hypothesis
2.2
is rejected.
Given the non-satisfactory change of performance in
liquidity and leverage ratios, with surprise it is
revealed in the nonparametric test that the
profitability ratios of distressed firms are
significantly different between the base year of the
court process of restructuring and one year after the
court process accordingly; therefore sub-
hypothesis
2.3
is accepted. Overall, it is plausible to
say that, unlike the first hypothesis, the second
hypothesis of the study is partially accepted.
TERDPAOPONG & FAROOQUE
128
Table 6 Comparative Result of Financially Distressed SMEs in base-year and 1-year after
the Court Directed Restructuring Process
Variable
Parametric
Independent Paired Sample T-Test
Nonparametric
Wilcoxon Ranked Test
Unadjusted data Adjusted data Unadjusted data
Sig.
(2-tailed)
Result
Sig.
(2-tailed)
Result
Asymp. Sig.
(2-tailed)
Result
Liquidity
1) CATA .153 NS .999 NS .130 NS
2) CLTA .141 NS .268 NS .095 *
3) WCTA .125 NS .277 NS .062 *
Leverage
4) LLTA .221 NS .100 * .422 NS
5) TLTA .707 NS .666 NS .932 NS
6) DE .571 NS .376 NS .020 **
Profitability
7) EBITTA .094 * .031 ** .007 ***
8) EAITTA .090 * .064 * .011 ***
*** Significant at .1% level (0.001)
** Significant at 1% level (0.01)
* Significant at 5% level (0.05)
NS: Not significant
Thus, in regards to first hypothesis it can be
concluded that in the context of Thai SMEs there are
significant differences between the financially
distressed and non-distressed firms in terms of their
financial ratios such as liquidity, profitability and
leverage. This signifies the severity of financial
difficulties as well as performance of distressed
firms. It is documented that financial distress starts
from not being able to service debts and payables in
due course and for not having sufficient liquidity
and/or profitability. While non-distressed firms may
have high leverage ratio similar to distressed firms,
that leverage can be served with their sufficient level
of liquidity and/or profitability. Sometimes liquidity
appears to be more important than profitability when
profit is not readily converted into cash flows. Also
liquidity depends on proper management of
inventory procurement and short sales revenue
recovery. Unlike non-financially distressed firms,
financially distressed ones are lacking in these
respects to repay liabilities in time and face severe
consequences. On the contrary, following the second
hypothesis it can be said that financially distressed
SMEs in Thailand takes longer time to show
turnaround from poor performance once they are in
the court process of restructuring. One year after the
restructuring process, they show moderate
improvement in their financials. Except profitability,
other areas of financials do not indicate massive
change through restructuring process. There may be
some other reasons for improving profitability,
which are beyond the scope of this study.
Conceivably different financials have not shown
consistency and expected satisfactory performance
change in distressed firms in the periods before and
after the restructuring. Turnaround has no hard and
fast time limit which may occur between 1 to 5 years
period depending on internal and external
environments of the firm. When both internal and
external environments are favorable to a firm, it
takes a shorter time period to turnaround from
restructuring stage and to run as a normal business
and vice versa. The evidence of this study indicate
that for Thai distressed SMEs turnaround requires
longer time, that is, more than one year time. One
year after restructuring is not sufficient as they are in
need of government support to get rid of financial
obstacles and to show expected satisfactory
performance to contribute to the economy. Their
internal environment is not sufficient to overcome
financial difficulty without assistance from external
environments.
7. Conclusions and Implications
Business failures occur worldwide, which
are more prevalent in SMEs than big enterprises.
Prior studies document substantial benefits of SMEs
to all financial systems of developed and emerging
economies. To maintain potential benefits from
SMEs as the main driving force of the economy,
there are incentives to support them and to keep
them out of financial difficulties for sustainable
economic progress of the country. This study
undertakes to empirically establish the similarities
RJAS Vol. 2 No. 2 Jul.-Dec. 2012, pp. 119-132
129
and/or differences in the financial characteristics
between the financially distressed and non-distressed
SMEs in Thailand as one of the two main objectives.
These characteristics are regarding liquidity,
financial leverage and profitability as investigated
through the use of both parametric (independent
paired sample T-Test) and non-parametric (Mann-
Whitney U Test) tests. Another objective is to
examine the turnaround of the distressed firms that
have gone through the court process of restructuring
to assist the enterprises to recover from their
financial difficulty. To observe the changes over
time between the base year of restructuring and one
year after being in court process, both parametric
(independent paired sample T-Test) and non-
parametric (Wilcoxon Ranked Test) tests.
In regards to findings, it is observed that
there exist statistically significant differences
between the financially distressed and non-distressed
SMEs, where distressed firms demonstrate less
liquidity, less profitability and highly leverage ratios
as compared to non-distressed firms. These results
are as per expectation and consistent to the findings
of prior studies. However, contrary to expectation,
distressed SMEs do not show satisfactory progress in
the aforementioned financial ratios except
profitability after one year of going through the court
directed restructuring process. This provides
evidence that restructuring takes longer time in Thai
SMEs to turnaround from financial difficulties and
poor performance.
The implications of the study in the context
of an emerging economy like Thailand is to provide
continued support and assistance that can ensure a
speedy financial recovery of distressed SMEs as well
as insure the positive effect of being financially
restructured firms for the economy. While financial
institutions and small enterprise owner-manager are
the parties most actively involved in this process,
suggestions regarding the financial aspects for the
recovery of an enterprise can be provided to all other
interested parties to ensure that the restructuring
process is worthwhile. Similarly, fundamental
characteristics of the business should be considered;
as well as the strong and weak points of the
company; management and shareholders and lenders
interest should also be considered as there is a
potential for conflict of interest among these parties
(Giddy, 2010; Miller, 1977; Modigliani & Miller,
1958).
Future research may be built up on the
limitations of the current study. Firstly, the sample
size selected in this study is limited, hence may not
be a true representation of the entire number of
distressed firms. Therefore, a larger sample size of
firms should be undertaken in future studies.
Secondly, the number of variables is also limited to
three areas of financials and the wide range of other
variables including non-financial data may assist the
researcher to find better characteristics that will
explain the financial distress of the firm. Thirdly, in
regards to the second objective of the study, the time
length after the firms have gone through the court
directed restructuring process is too short and should
be extended beyond one year as the financial profiles
of the SMEs failed to generate a speedy turnaround
by showing non-satisfactory progress in financial
ratios except profitability. It is also worth looking
for other reasons of improvement in profitability
ratios while other financials reveal a weak power of
change between base year and one year after the
restructuring process. Added to this is the fact that
the sample was taken from different periods of time
with unequal financial pressures due to the
differences in the overall economic climate, legal
assistance and programs as well as research methods
and techniques on which future research studies may
look at from different perspectives not covered in
this study in order to enhance the body of knowledge.
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Financial Distress, Restructuring And Turnaround Evidence From Thai Smes
Rangsit Journal of Arts and Sciences, July-December 2012 RJAS Vol. 2 No. 2, pp. 119-132
Copyright © 2011, Rangsit University
119
Financial distress, restructuring and turnaround: evidence from Thai SMEs
Kanitsorn Terdpaopong
1*
and Omar Al Farooque
2
1
Faculty of Accountancy, Rangsit University, Patumthani 12000, Thailand
Email: [email protected]
2
UNE Business School, Faculty of the Professions
University of New England, 2352 Australia
Email: [email protected]
*
Corresponding author
Submitted 4 March 2012; accepted in final form 19 November 2012
____________________________________________________________________________________________________________
Abstract
This study examines firstly whether there are significant differences in the financial characteristics of financially
distressed and non-distressed SMEs in Thailand, and secondly, whether distressed SMEs can quickly turnaround once they
enter into the court directed restructuring process. Building on both parametric and non-parametric tests and a good number
of sample SMEs in both groups of firms, it provides evidence that the Thai financially distressed SMEs are significantly
different from their non-distressed counterparts in terms of profitability, liquidity and leverage. Again, for the distressed
SMEs that have entered into the court process of restructuring, turnaround is seemed to be a longer-term phenomenon rather
than short-term, as the findings show weak signs of improvement in the financials of interest except a few. This implies that
financial recovery and performance do not happen as quickly as expected after restructuring. These findings of the study
have implications for an emerging economy such as Thailand for providing continued support and assistance that can ensure
speedy financial recovery of distressed SMEs as well as insure the positive effect of being financially restructured firms for
the economy.
Keywords: financial characteristics, Thai distressed and non-distressed SMEs, turnaround, restructuring
________________________________________________________________________________________________
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????? ?? ???? ??? ??????????? ?????????? ??????? ??? ??????? ? ??? ?????????? ?????? ????? ?? ???? ??????? ???????????? ? ?? ???? ?? ???? ??? ?????
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????????????? ??????????? ?????????????????????? ????????????????????????????? ? SMEs ????? ???????? ???? ?? ?? ??????????? ???? ? ?? ??? ? SMEs
?????????????????????? ??? ?? ??? ????????????? ???? ????? ????? ???? ?? ?? ??? ?????? ??? ? SMEs ??? ??? ?? ?? ???????????? ????????????? ????????? ?? ???
????????? ?????????????????????????? ????????????? SMEs ??? ?? ?? ???????????? ????? ???? ???? ???????????? ???????? ?????? ?? ????????? ?????? ??? ?
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?????????????????????? ????????? ?????????????????? ??????????????????????????????????????????????? ????????????????? ?????? ?????? ??
????????? ??????????????????????? ?????????????????????????????? SMEs ?????????? ???????????????????????????????????????????
???????: ???????????????????, ?????? SMEs ??????????????????????????, ???????????, ????????????????????
__________________________________________________________________________________________
1. Introduction
Business failure is not uncommon across
the globe, it rather becomes a recurring event despite
the fact that the factors, both internal and external to
the firm, that lead a business to failure, may vary
across countries. It is perceived that numerous
internal factors including ineffectiveness of
management, cost inefficiency, poor employee
productivity, etc. is directly attributable to the firm’s
financial distress and bankruptcy. However, often
some external factors such as economic recession,
high interest rates, inflation, government regulation,
etc. could contribute to a firm’s liquidation that is
beyond the control of a firm. Charalambous (2004)
contends that in the past two decades, business
failures have occurred at higher rates than at any
TERDPAOPONG & FAROOQUE
120
other time since the early 1930s. The failure of a
business has severe economic consequences and
substantial costs, both financial and psychological, to
numerous parties involved. The economic cost of
business failures are significant in terms of both
direct and indirect effects that include among others
the expenses of either liquidating or attempting to
restructure the internal financial domain of the
business, accounting and legal fees and other
professional service costs that resulted due to the
crisis.
It is conceivable that ‘financial distress’ of a
firm ultimately leads to insolvency and business
failure. Lee and Yeh (2004) identified a firm as
financially distressed when: a) it defaults on loan
repayments, b) its net worth falls below half of its
stock, c) it engages in loan term negotiations.
Asquith, Robert, and Scharfstein (1994) identified an
unhealthy firm if in any two consecutive years, the
firm’s earnings before interest, tax, depreciation and
amortization are less than 80% of its interest
expense. Again, Elloumi and Gueyle (2001)
classified a financially distressed firm if the firm has
experienced negative earnings per share
consecutively for 5 years. Wruck (1990) classified a
firm as being financially distressed when its cash
flows are not sufficient to cover its current
obligations. Whitaker (1999) contended a firm being
in financial distress when cash flows are less than the
current maturities of long-term debt. They imply that
poor financial performance is the root cause of a firm
falling into financial distressed.
In the business world, ‘turnaround’ is used
when poor financial performance of a firm
experiences a positive reversal. Schendel, Patton,
and Riggs (1976), Bibeault (1982), Hambrick and
Schecter (1983) and Robbins and Pearce (1992)
defined turnaround as performance decline followed
by performance improvement. Turnaround strategies
denotes to implementing changes in the internal
management of a failing firm. Turnaround strategies
typically include retrenchment, repositioning and
reorganization etc. which management can use in
overcoming the organizational decline (Hambrick &
Schecter, 1983; Pearce & Robbins, 1993;
Arogyaswamy, Barker, & Yasai-Ardekani, 1995).
Retrenchment, repositioning and reorganization are
broadly recognized as ‘restructuring’. Retrenchment
refers to reduction in the size and scope of a
business. It includes quitting difficult markets or part
of the business that is unproductive and unprofitable,
downsizing, disposing of assets etc. that can control
further financial losses and generate additional
resources for future profitability. Reorganization
includes new structures, human resource
management, replacement of top executives etc. and
repositioning emphasizes on growth that includes
finding new markets, seeking new resources, or new
products to generate more revenue. The restructuring
attempts that lead to turnaround are pursued
differently in different firms based on their needs and
managerial judgment.
Financial insolvency is one of the most
significant threats for many businesses in Thailand
since the economic crisis in 1997. Many businesses
in Thailand have become bankrupt that resulted in a
chain-effect to other associated and connected
businesses. As business collapse occurs, Small and
Medium Enterprises (SMEs) have been seen as one
of the key engines to sustain economic growth in
Thailand. Although business failure were studied
widely for big enterprises to identify the signs or
early detection symptoms that lead to potential
business failure or developing financial difficulty,
Thai SME sector has not received sufficient research
attention despite the recent trend of emphasis on
SMEs (Bàkiewicz, 2005). Therefore, this study aims
to fill this gap in the literature regarding Thai small
and medium-sized enterprises and their financial
restructuring. The purpose of the study is twofold,
firstly to distinguish the similarities or differences
between financially distressed SMEs and financially
non-distressed SMEs in Thailand with respect to
their financials such as liquidity, financial leverage
and profitability; secondly to analyze the turnaround
of financially distressed SMEs one year after the
insolvency (i.e. being in the Central Bankruptcy
Courts in Thailand) in terms of their financials.
The remainder of the paper is as follows:
Section 2 discusses literature briefly while Section 3
focuses on the Thai context of SMEs and their
restructuring. Section 4 provides data and hypotheses
of the study and Sections 5 discusses on research
method. Finally, Section 6 concludes the findings
and implications therein.
2. Literature Review
SMEs are identified in a number of ways
considering different aspects of the internal
structures of the businesses. The size of total assets,
amount of fixed assets, total assets in the balance
sheets, total sale volume or some combination of
these factors has mostly been employed to identify
SMEs. However, the number of employees is
RJAS Vol. 2 No. 2 Jul.-Dec. 2012, pp. 119-132
121
considered to be the most frequently identifying
factor used in many countries (Asian Productivity
Organization; Storey, 1994). For instance, the
definition of the European Commission states that
small and medium-sized enterprises are firms that
employ less than two hundred and fifty staff and
have an annual turnover not exceeding €50 million
or an annual balance sheet total not exceeding €43
million (European Commission, 2003). The
definition of SME as used by the new Basal Capital
Accord considered those businesses with a sales
volume of less than US$65 million as SMEs (Altman
& Sabato, 2007). In the USA businesses are
classified as very small enterprises if they employ
less than twenty staff, small enterprises if they
employ less than one hundred staff, and medium
enterprises if they employ less than five hundred
employees (Office of Advocacy, 1984). Within the
manufacturing business sector of Australia, small
enterprises are those that employ less than one
hundred staff with medium enterprises being those
firms that employ less than two hundred staff
(Holmes & Kent, 1991; Meredith, 1982). The nations
of China, Indonesia, Japan, Korea, Malaysia, and
Singapore also utilized the number of employees as
the basis for the classification of firms, however with
different levels of employment size as cut off points
(Khader & Gupta, 2002). Thus, it can be argued that
where both categories of the value of fixed assets
and the number of employees are placed, the firm is
either a small or a medium one; the lower of the two
will determine how the enterprise should be
classified (Institute for Small and Medium
Enterprises Development, 2006)
A considerable number of studies have
focused largely on the incidence of bankruptcy in
various settings. There has been advanced empirical
research attempting to develop models using the
financial data of firms that appear successful and
those firms that fail or become bankrupt, such as the
research by Beaver (1966), Altman (1968, 1983,
1993, 2007), Deakin (1972, 1976), Edmister (1972),
Berryman (1982), Fulmer, Moon, Gavin and Ervin
(1984). However, very little research has been
undertaken on financial distress probability of the
firm, in particular focusing on SMEs. Moreover little
attention has been paid to creating a model to
calculate the credit risk for SMEs (Altman & Sabato
2007; Altman, Sabato, and Wilson, 2008). Such
study is warranted to predict the failure of SMEs as
SMEs tend to exhibit risk characteristics that differ
from those of large corporations (Chan & Chen,
1991; Holmes & Kent, 1991; Hutchinson &
Michaelas, 2000; Walker & Petty, 1978). Of
particular interest is predicting business failure,
which has been a major concern of researchers for
several decades (Ahn, Cho & Kim, 2000). While
the study of business stability has been the major
focus of many researchers (Altman & Sabato, 2007;
Altman, Sabato, & Wilson, 2008), some researches
focus on identifying financial characteristics of
SMEs (for example, Dennis, 1993; English, 2001;
Hall, Hutchinson, & Michaelas, 2000; Hatten,
1997; Holmes, Hutchinson, Forsaith, Gibson, &
McMahon, 2003; Holmes & Zimmer, 1994; Huang
& Brown, 2000; Hutchinson, Meric, & Meric,
1988; McMahon, Holmes, Hutchinson, & Forsaith
1993; Chittenden, Hall, & Hutchinson, 1996), while
others concentrate on the financial characteristics
of large corporates (such as, Bei and Liu, 2005;
Chan & Chen, 1991; Holmes & Kent, 1990; Shu-e
& Li, 2005; Walker & Petty, 1978).
With considerable economic significance of
SMEs the need to understand the underlying reasons
for SME failure has attracted research attention in
recent times. Of further interest is the need for the
comprehension of the difficulties required to be
successfully solvent and the measures to be
employed and their outcomes during the
restructuring process to enhance the financial
stability of the business. This study will, thus, shed
light on financial distress of Thai SMEs and their
subsequent restructuring and turnaround atmosphere
through analyzing relevant financial characteristics
of selected SMEs. This study is particularly
concerned on the firms that have gone through the
court-supervised restructuring process, so the SMEs
that filed a petition with the Central Bankruptcy
Court during 2002–2005 for corporate restructuring
have been selected.
3. Thai Context of SMEs and Their Restructuring
Process
SMEs are fundamental units of the Thai
economy, constituting over 99 per cent of the total
number of enterprises in the country (Office of
SMEs Promotion 2007). In Thailand, SMEs are
categorized by three major features: production,
service and trading and they are classified as small or
medium enterprises through the amount of fixed
assets, excluding land, and the number of employees
(see Table 1).
TERDPAOPONG & FAROOQUE
122
Table 1 Size Classification of Small and Medium Enterprises in Thailand
Sector
Small Enterprise Medium Enterprise
Employment
(no. of people)
Fixed assets
(Million Baht)
Employment
(no. of people)
Fixed assets
(Million Baht)
Production ? 50 ? 50 51 - 200 > 50-200
Service ?50 ? 50 51 - 200 > 50-200
Trading:
Wholesale ?25 ? 50 26-50 > 50-100
Retail ?15 ? 30 16-30 > 30-60
Source: Institute for Small and Medium Enterprises Development (2006)
The importance of SMEs in job creation
and stimulating economic growth has been
recognized (Bàkiewicz, 2005; Veskaisri, 2007). As a
result of this recognition, the issue of sustainability
of SMEs has been getting momentum as a significant
factor in the development of government policies.
Although Thai Government has implemented
policies to enhance the capability of SMEs, the
problem of SMEs potential failure still persists. The
committee for the Promotion of SMEs summarized
the obstacles faced by Thai SMEs in four main
categories: limited financial access, the loss of
competitive advantage, the lack of good corporate
governance, and ineffective support from the
government (Office of SMEs Promotion 2006 and
2007). The financial aspect of SMEs failure has
attracted particular policy attention in Thailand since
the financial crisis of 1997. At this time, the
percentage of non-performing loans (NPLs) to total
credits of the country’s financial system hit 47.7 per
cent, which is the highest in the history of the
country (Bank of Thailand 2008). This crisis
triggered the Government’s greater concern for
economic recovery and growth (Bàkiewicz, 2005;
Swierczek & Ha, 2003). The Thailand Ninth
National Economic and Social Development Plan
(2001–2006) (Thai 9
th
NESDP; Office of The
National Economic and Social Development Board
2001) emphasized the concern for economic
development, which promoted and encouraged a
focus on SMEs development. The Thai Government,
through the Office of SMEs Promotion (OSMEP),
formulated the 1
st
SMEs Promotion Plan (2002-
2006) that aimed at resolving the effects of the
economic crisis and supporting the revival of SMEs.
Restructuring Process
In Thailand, stressed assets are seen as non-
performing loans (NPLs) on the financial statements
of the Thai financial institutions. The number of
NPLs has substantially increased since the 1997
economic crisis; this has resulted in numerous
corporate failures and a record number of NPLs in
the financial system (Vongvipanond, 2004).
Corporate financial restructuring is the preferred way
used to satisfy both debtors and creditors. Such
restructuring involves substantial changes in a
company’s financial structure or ownership and
control, and possibly the internal business portfolio
with the intention of increasing the value of the firm.
The proper restructuring of stressed assets and
liabilities may allow potentially successful
companies to continue their business activities and
survive the financial crisis (Giddy, 2010).
There are two methods available for
pursuing the restructuring process in Thailand since
its introduction into the Thai economy: (i) out-of-
court restructuring and (ii) court-supervised
restructuring (Bank of Thailand, 2001; Dasri, 2001).
There are several organizations involved in the out-
of-court process to assist the distressed firms to
financially recover such as the informal restructuring
within financial institutions, the Corporate Debt
Restructuring Advisory Committee (CDRAC), the
SET-Rehabco Restructuring as established by the
Stock Exchange of Thailand (SET) and the asset-
management companies (AMCs) (Dasri, 2005;
Rroude, 2005). However, highly distressed firms
may require more complex restructuring methods
offered through the court process rather than the out-
of-court procedures. Once the Court approves the
petition, the process of restructuring then takes place.
The method that is frequently used in the debt
restructuring process, in both out-of-court and court-
supervised restructuring processes, is a combination
of a number of alternatives, such as the extension of
the loan period with or without a grace period for the
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123
principal or interest and/or debt forgiveness. This can
also include the conversion of debt to equity through
the transfer of the debt burden to an affiliated
company, the conversion of the debt to convertible
debenture and the transfer of other assets such as
investment capital, claims on debtors, zero coupon
bonds, office buildings, real estate, machinery,
houses, and golf courses to an affiliated company.
The distressed firms may also receive a continuation
of their current credit line or a credit guarantee. The
restructuring plans, such as the extension of a loan
period in which some of the obligations are
extended, ensure that businesses have a greater or
increased cash flow, and in case that restructuring
had been offered exemption of an interest expense
with a grace period of between 1-3 years, or debt
forgiveness in some portions of total debts, which
further enhances cash flow into the businesses and
enables the businesses to pay financial obligations as
they come due. Together with having a normal credit
line or increasing the credit line ensures that the
business continues growing, and eventually
regaining financial success. However, if the court
does not approve the restructuring plan or terminates
the reorganization, with orders of absolute
receivership, the debtor undergoes bankruptcy
procedures. The successful implementation of the
restructuring process has been the major key to assist
businesses to return to normal financial activity.
4. Hypotheses and Data
In this study, the term ‘financially
distressed firm’ is used to refer to businesses that
were involved in the Central Bankruptcy Court
actions such as internal reorganization, financial re-
arrangement or receivership, or the firms that were
unable to pay their financial obligations as they
mature. The characteristics of such financially
distressed firms are (i) firms showing low liquidities
with their current liabilities greater than their current
assets, (ii) firms with high debts, where their total
liabilities greater than their total assets or firms with
negative equities, (iii) firms having low or negative
profitability by the end of their financial year. It also
employed the use of financial ratios to distinguish
between the two focus groups of firms, financially
distressed and non-distressed firms, and to examine
the turnaround performance of restructuring in the
distressed firms. It is thus worthwhile to examine the
financials of both groups of firms with respect to
three different categories of liquidity, leverage and
profitability. The following hypotheses are set for the
research purpose.
H
1
: There are significant differences in financial ratios between the Thai financially distressed
and financially non-distressed SMEs. That is,
H
1.1
: Liquidity of the Thai financially distressed SMEs is less than that of
non- financially distressed SMEs.
H
1.2
: Financial leverage of the Thai financially distressed SMEs is greater than that of
non- financially distressed SMEs.
H
1.3
: Profitability of the Thai financially distressed SMEs is less than that of non-
financially distressed SMEs.
H
2
: After the restructuring, there is significant improvement in financial ratios in
the Thai turnaround SMEs who were in financial distress in terms of liquidity, leverage and
profitability. That is,
H
2.1
: Liquidity of the Thai turnaround SMEs increases after the restructuring.
H
2.2
: Financial leverage of the Thai turnaround SMEs decreases after the restructuring.
H
2.3
: Profitability of the Thai turnaround SMEs increases after the restructuring.
TERDPAOPONG & FAROOQUE
124
In regards to the first hypothesis, it is
anticipated that financially distressed SMEs are
significantly different from that of financially non-
distressed SMEs. As the distressed SMEs are facing
financial difficulty, it is expected that they would
have less liquidity and profitability and high leverage
compared to non-distressed SMEs. The second
hypothesis relates to the changes over time as the
financially distressed SMEs go through the court
guided restructuring process. By taking the financial
ratios of companies for base year and one year after
the restructuring, it is expected that there is an
increase in their liquidity and profitability and a
decrease in financial leverage in the post-
restructuring period as compared to the pre-
restructuring period.
The samples of financially distressed firms
in this study were selected from firms that went
through the Central Bankruptcy Courts (CBC),
Thailand during 2002–2005 periods. It is
conceivable that all the firms going through the
courts would have the status of a non-performing
loan (NPL) at the time of entering the court
procedure for restructuring. The firms being selected
for this study were showing low liquidities, low
profitability, and high debts at the time they went to
the courts for restructuring. However, the future of
these firms, whether it is a business collapse or
financial failure or bankruptcy, depended on the
progress of their restructuring of loans and plans for
improving their financial performance and success in
other related factors. Again, the criteria chosen to
classify the size of the business was the asset size
gained from the consideration of the balance sheets
together with considering the recommendation of the
European Commission that the annual balance sheet
(or total assets) of enterprises should not exceed €43
million (or THB 2,000 million (x-rate.com, 2006))
being classified as small and medium-size
enterprises (European Commission 2003). This
chosen criteria is also consistent with the information
of the Market for Alternative Investment (MAI)
listed companies which are considered as Thai
medium-sized enterprises, with each company not
having a total amount of assets on the balance sheet
over THB 2,000 million (Market for Alternative
Investment 2007). Therefore, in this study, the
business with an asset size THB 2,000 million or less
is classified as small and medium.
Following the above criteria, the list of the
distressed firms was obtained from the website of the
Legal Execution Department, Ministry of Justice,
Thailand (http://www.led.go.th). The financial
statements were then obtained from the website of
the Department of Business Development (DBD),
the former Ministry of Commerce, Thailand
(http://www.dbd.go.th). In total the financial data is
gained from the balance sheets and income
statements of 68 financially distressed companies
that went into the Central Bankruptcy Court during
the period 2002–2005 for restructuring. Similarly,
financial data of 191 financially non-distressed firms
were obtained directly through the website of the
DBD for the same period. Both 68 financially
distressed and 191 non-distressed SMEs constitute
the gross sample size of this study totaling 259
SMEs. However, this unadjusted data (including all
outliers) is later trimmed by excluding outliers from
both groups of firms, which leaves the final sample
as 42 financially distressed, 174 financially non-
distressed SMEs to a total of 216 SMEs.
5. Research Method
In regards to variable selection and
methodology applied, this study provides an analysis
of financial ratios to enhance the ability to
differentiate the financial characteristics of
financially distressed from non-distressed Thai
SMEs as well as examine the changes over time of
the distressed firms’ financial ratios of base year and
one year after being in the court, using 0.05 at the
significance level. A comparative statistical
description of eight variables is used in this paper for
distressed and non-distressed firms. Both parametric
(independent and dependent paired sample T-test)
and non-parametric (Mann-Whitney U test and
Wilcoxon signed rank test) methods are used to
analyze the eight variables in order to find the
significant differences between the two sample
groups. Since the variables do not show normal
distribution, the non-parametric approach using the
Mann-Whitney U Test is considered the best
approach to record the similarities and/or differences
of financially distressed and non-distressed SMEs.
Similarly, the nonparametric method, the Wilcoxon
Signed Rank Test, is used and considered the best fit
to observe the changes over time in distressed firms
between their base year of court proceedings for
restructuring and one year after being in court
procedures.
Table 2 presents selected variables for the
analysis and comparison between the financially
distressed and non-distressed firms, and between the
distressed firms with a lag of 1 year from their base
RJAS Vol. 2 No. 2 Jul.-Dec. 2012, pp. 119-132
125
year of court proceedings for restructuring. These
independent variables are most commonly used by
previous studies, which may be divided into three
categories: 1) Liquidity, 2) Leverage and 3) Profitability.
Table 2 Variable Definition
Variables Calculated as:
Measures of liquidity:
1. Current assets to total assets ratio
(CATA)
The amount of cash, account receivables, bills, inventory and other current
assets as a percentage of total assets.
2. Current liability to total assets ratio
(CLTA)
The amount of account payables, and other short-term liability as a percentage
of total assets.
3. Working capital to total assets ratio
(WCTA)
The current assets less current liability as a percentage of total assets.
Measures of financial leverage:
1. Long-term liability to total assets ratio
(LLTA)
The amount of long-term liabilities as a percentage of total assets.
2. Total liability to total assets ratio
(TLTA)
The amount of short-term and long-term liabilities as a percentage of total
assets.
3. Debt to equity ratio (DE) The amount of debt divided by equity.
Measures of profitability:
1. Earnings before interest and tax
expenses to total assets ratio (EBITTA)
All earnings before interest and tax expenses as a percentage of total assets.
2. Earnings after interest and tax expenses
to total assets ratio (EAITTA)
All earnings after interest and tax expenses as a percentage of total assets.
6. Empirical Results and Discussion
Table 3 documents the comparisons
between distressed and non-distressed SMEs for the
adjusted sample (outliers excluded) of 42 and 174
firms, respectively. It reveals high level of
satisfactory liquidity ratios of non-distressed SMEs
as compared to the distressed firms, which are more
than double in the former firms than the latter firms.
The average of CATA ratio is 73.67 for non-
distressed SMEs and 40.71 for distressed SMEs.
Similarly, WCTA ratio is 35.54 for non-distressed
firms and -46.78 for distressed ones. Also CLTA
ration is 38.13 for the former and 87.49 for the latter.
All these ratios indicate significant differences
between distressed and non-distressed firms as
reflected in their financials. As expected,
profitability ratios of non-distressed SMEs are
positive against negative ratios for distressed SMEs.
EBITTA and EAITTA ratios are 13.24 and 8.88
respectively for the former while -12.14 and -28.38
for the latter. Such levels can explain the extensity of
financial distress of the negative profit-earning firms
in Thailand when compared with their counterpart in
financially solvent firms. Likewise, the same pattern
is reflected in leverage ratios for both groups of
firms and the high level of ratios for distressed firms
than non-distressed. Debt-equity ratio is negative for
distressed firms (-3.13) but positive for non-
distressed firms (1.64). Both total liability and long-
term liability to total asset ratios are exceptionally
high in distressed firms, 160.53 and 73.04
respectively. These ratios are 46.62 and 8.49, in non-
distressed firms respectively. Overall, differences in
liquidity ratios are huge between both groups of
firms that explicitly explain the circumstances that
each group is facing in Thailand.
TERDPAOPONG & FAROOQUE
126
Table 3 Descriptive Statistics of Thai Financially Distressed and Non-distressed SMEs
Non-distressed SMEs Distressed SMEs
Variable Mean
Standard
Deviation
Mean Standard Deviation
Liquidity
1) CATA
2) CLTA
3) WCTA
73.6716 22.4105 40.7107 27.4344
38.1278 24.8029 87.4880 61.2530
35.5440 21.9308 -46.7774 65.4858
Leverage
4) LLTA
5) TLTA
6) DE
8.4876 16.0430 73.0424 68.0272
46.6151 25.5493 160.5304 54.4584
1.6466 1.9827 -3.1303 5.9675
Profitability
7) EBITTA
8) EAITTA
13.2424 9.1235 -12.1419 44.9312
8.8759 6.6189 -28.3778 63.8593
Number of sample: 174 Non-Financially distressed SMEs
: 42 Financially distressed SMEs
Table 4 provides comparison of
financially distressed SMEs between their base
year of court procedures for restructuring and one
year after going to the court. It is documented that
five out of eight variables have improved after
being in court restructuring process. In particular,
both liquidity and profitability ratios show
significant change as compared to their levels in
base year. Among the liquidity rations, both CLTA
and WCTA ratios improved from 87.49 to 72.04
and -46.78 to -31.32, respectively. CATA ratio
remains in the same level. Similarly, profitability
ratios EBITTA and EAITTA improved from,
-12.14 to 15.14 and -28.38 to 7.64, respectively. Of
the leverage ratios, only debt-equity ratio has made
progress from -3.13 to -2.19, while other two ratios
(i.e. LLTA and TLTA) have deteriorated from their
previous levels. While such deterioration of
leverage ratios is not surprising during the period
of restructuring process, other ratios indicate
performance improvement in terms of profitability
and liquidity. These results signify the
effectiveness of court directed restructuring
process of SMEs in Thailand to get rid of financial
distress and in some cases bail them out from
severe financial difficulties and poor performance.
Table 4 Descriptive Statistics of Financially Distressed SMEs base-year and 1-year after
the Court Directed Restructuring process
Variable
Base year
of the court process
One year AFTER
the court process
Mean
Standard
Deviation
Mean
Standard
Deviation
Liquidity
1) CATA
2) CLTA
3) WCTA
Leverage
4) LLTA
5) TLTA
6) DE
Profitability
7) EBITTA
8) EAITTA
40.7107 27.4344 40.7146 29.4819
87.4880 61.2530 72.0375 87.1358
-46.7774 65.4858 -31.3229 99.0346
73.0424 68.0272 94.8063 85.4017
160.5304 54.4584 166.8438 91.4711
-3.1303 5.9675 -2.1910 4.0283
-2.6290 17.5845 15.1387 52.0591
-9.5674 18.1872 7.6441 57.9067
Number of sample: 42 Financially distressed SMEs in base year of being in the court
: 42 Financially distressed SMEs one year AFTER being in the court
RJAS Vol. 2 No. 2 Jul.-Dec. 2012, pp. 119-132
127
Table 5 denotes comparative results of the
financial ratios of financially distressed and non-
distressed SMEs following parametric T test and
non-parametric Mann-Whitney U Test. Given that
the latter test is more reliable than the former in the
sample of not normally distributed for both groups of
firms, both tests show that for liquidity, leverage and
profitability ratios, there is a statistically significant
difference within each variable in interest, a total of
eight variables. The characteristics of the financially
distressed SMEs are shown to be having low
liquidity, high leverage and low profitability while
the non-distressed SMEs demonstrate a sound
financial profile in the opposite direction having high
liquidity, low leverage and high profitability. All
eight variables show significant difference between
financially distressed and non-distressed SMEs in
both parametric and non-parametric tests. Therefore,
the first hypothesis of the study including all sub-
hypotheses (H
1.1
, H
1.2
, and H1.3) is accepted.
Table 5 The Comparative Result of Financially Distressed and Non-distressed SMEs
Variable
Parametric
Independent Paired Sample T-Test
Nonparametric
Mann-Whitney U Test
Unadjusted data Adjusted data Unadjusted data
Sig.
(2-tailed)
Result
Sig.
(2-tailed)
Result
Asymp. Sig.
(2-tailed)
Result
Liquidity
1) CATA .000 *** .000 *** .000 ***
2) CLTA .000 *** .000 *** .000 ***
3) WCTA .000 *** .000 *** .000 ***
Leverage
4) LLTA .000 *** .000 *** .000 ***
5) TLTA .000 *** .000 *** .000 ***
6) DE
Profitability
7) EBITTA .000 *** .000 *** .000 ***
8) EAITTA .000 *** .000 *** .000 ***
*** Significant at .1% level (0.001)
Table 6 reports comparative results of
financially distressed SMEs between their base year
of the court process of restructuring and one year
after the court process to indicate whether distressed
firms could be able to turnaround from financial
difficulties by showing satisfactory performance in
their liquidity, profitability and leverage, etc. As the
restructuring process has been implemented though
the court process, the overall performance of
distressed firms is expected to improve such as an
increase in liquidity ratios along with profitability
and decrease in leverage ratios. Contrary to expectation,
both parametric T test and non-parametric Wilcoxon
ranked Test in Table 6 provides inconsistent
findings. While parametric test indicates no
significant change in the financial ratios of liquidity,
profitability and leverage in the distressed SMEs
between their base year of the court process of
restructuring and one year after the court process,
non-parametric test shows significant change in
profitability ratios and debt-equity ratio only. Two of
the three liquidity ratios show a weak level of
significant change at 10% significance level. This
implies that the court process does not improve the
liquidity of distressed firms as per expectation; thus
sub-hypothesis
2.1
is partially accepted. Similarly, two of
the three leverage ratios reveal no significant
changes between the base year and the year after
being in court; thus sub-hypothesis
2.2
is rejected.
Given the non-satisfactory change of performance in
liquidity and leverage ratios, with surprise it is
revealed in the nonparametric test that the
profitability ratios of distressed firms are
significantly different between the base year of the
court process of restructuring and one year after the
court process accordingly; therefore sub-
hypothesis
2.3
is accepted. Overall, it is plausible to
say that, unlike the first hypothesis, the second
hypothesis of the study is partially accepted.
TERDPAOPONG & FAROOQUE
128
Table 6 Comparative Result of Financially Distressed SMEs in base-year and 1-year after
the Court Directed Restructuring Process
Variable
Parametric
Independent Paired Sample T-Test
Nonparametric
Wilcoxon Ranked Test
Unadjusted data Adjusted data Unadjusted data
Sig.
(2-tailed)
Result
Sig.
(2-tailed)
Result
Asymp. Sig.
(2-tailed)
Result
Liquidity
1) CATA .153 NS .999 NS .130 NS
2) CLTA .141 NS .268 NS .095 *
3) WCTA .125 NS .277 NS .062 *
Leverage
4) LLTA .221 NS .100 * .422 NS
5) TLTA .707 NS .666 NS .932 NS
6) DE .571 NS .376 NS .020 **
Profitability
7) EBITTA .094 * .031 ** .007 ***
8) EAITTA .090 * .064 * .011 ***
*** Significant at .1% level (0.001)
** Significant at 1% level (0.01)
* Significant at 5% level (0.05)
NS: Not significant
Thus, in regards to first hypothesis it can be
concluded that in the context of Thai SMEs there are
significant differences between the financially
distressed and non-distressed firms in terms of their
financial ratios such as liquidity, profitability and
leverage. This signifies the severity of financial
difficulties as well as performance of distressed
firms. It is documented that financial distress starts
from not being able to service debts and payables in
due course and for not having sufficient liquidity
and/or profitability. While non-distressed firms may
have high leverage ratio similar to distressed firms,
that leverage can be served with their sufficient level
of liquidity and/or profitability. Sometimes liquidity
appears to be more important than profitability when
profit is not readily converted into cash flows. Also
liquidity depends on proper management of
inventory procurement and short sales revenue
recovery. Unlike non-financially distressed firms,
financially distressed ones are lacking in these
respects to repay liabilities in time and face severe
consequences. On the contrary, following the second
hypothesis it can be said that financially distressed
SMEs in Thailand takes longer time to show
turnaround from poor performance once they are in
the court process of restructuring. One year after the
restructuring process, they show moderate
improvement in their financials. Except profitability,
other areas of financials do not indicate massive
change through restructuring process. There may be
some other reasons for improving profitability,
which are beyond the scope of this study.
Conceivably different financials have not shown
consistency and expected satisfactory performance
change in distressed firms in the periods before and
after the restructuring. Turnaround has no hard and
fast time limit which may occur between 1 to 5 years
period depending on internal and external
environments of the firm. When both internal and
external environments are favorable to a firm, it
takes a shorter time period to turnaround from
restructuring stage and to run as a normal business
and vice versa. The evidence of this study indicate
that for Thai distressed SMEs turnaround requires
longer time, that is, more than one year time. One
year after restructuring is not sufficient as they are in
need of government support to get rid of financial
obstacles and to show expected satisfactory
performance to contribute to the economy. Their
internal environment is not sufficient to overcome
financial difficulty without assistance from external
environments.
7. Conclusions and Implications
Business failures occur worldwide, which
are more prevalent in SMEs than big enterprises.
Prior studies document substantial benefits of SMEs
to all financial systems of developed and emerging
economies. To maintain potential benefits from
SMEs as the main driving force of the economy,
there are incentives to support them and to keep
them out of financial difficulties for sustainable
economic progress of the country. This study
undertakes to empirically establish the similarities
RJAS Vol. 2 No. 2 Jul.-Dec. 2012, pp. 119-132
129
and/or differences in the financial characteristics
between the financially distressed and non-distressed
SMEs in Thailand as one of the two main objectives.
These characteristics are regarding liquidity,
financial leverage and profitability as investigated
through the use of both parametric (independent
paired sample T-Test) and non-parametric (Mann-
Whitney U Test) tests. Another objective is to
examine the turnaround of the distressed firms that
have gone through the court process of restructuring
to assist the enterprises to recover from their
financial difficulty. To observe the changes over
time between the base year of restructuring and one
year after being in court process, both parametric
(independent paired sample T-Test) and non-
parametric (Wilcoxon Ranked Test) tests.
In regards to findings, it is observed that
there exist statistically significant differences
between the financially distressed and non-distressed
SMEs, where distressed firms demonstrate less
liquidity, less profitability and highly leverage ratios
as compared to non-distressed firms. These results
are as per expectation and consistent to the findings
of prior studies. However, contrary to expectation,
distressed SMEs do not show satisfactory progress in
the aforementioned financial ratios except
profitability after one year of going through the court
directed restructuring process. This provides
evidence that restructuring takes longer time in Thai
SMEs to turnaround from financial difficulties and
poor performance.
The implications of the study in the context
of an emerging economy like Thailand is to provide
continued support and assistance that can ensure a
speedy financial recovery of distressed SMEs as well
as insure the positive effect of being financially
restructured firms for the economy. While financial
institutions and small enterprise owner-manager are
the parties most actively involved in this process,
suggestions regarding the financial aspects for the
recovery of an enterprise can be provided to all other
interested parties to ensure that the restructuring
process is worthwhile. Similarly, fundamental
characteristics of the business should be considered;
as well as the strong and weak points of the
company; management and shareholders and lenders
interest should also be considered as there is a
potential for conflict of interest among these parties
(Giddy, 2010; Miller, 1977; Modigliani & Miller,
1958).
Future research may be built up on the
limitations of the current study. Firstly, the sample
size selected in this study is limited, hence may not
be a true representation of the entire number of
distressed firms. Therefore, a larger sample size of
firms should be undertaken in future studies.
Secondly, the number of variables is also limited to
three areas of financials and the wide range of other
variables including non-financial data may assist the
researcher to find better characteristics that will
explain the financial distress of the firm. Thirdly, in
regards to the second objective of the study, the time
length after the firms have gone through the court
directed restructuring process is too short and should
be extended beyond one year as the financial profiles
of the SMEs failed to generate a speedy turnaround
by showing non-satisfactory progress in financial
ratios except profitability. It is also worth looking
for other reasons of improvement in profitability
ratios while other financials reveal a weak power of
change between base year and one year after the
restructuring process. Added to this is the fact that
the sample was taken from different periods of time
with unequal financial pressures due to the
differences in the overall economic climate, legal
assistance and programs as well as research methods
and techniques on which future research studies may
look at from different perspectives not covered in
this study in order to enhance the body of knowledge.
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