1.0 Background

The hotel and the tourism sector of the country continues to grow; the tourism sector of the country was suffering heavily until 2009 when the civil war of the country was ended. The growth of the sector was driven after the end of the war that was taking a heavy toll for the last 30 years. The country has soon continuous growth in the sector and this is likely to ensure that they will benefit from the appropriate outcomes and achieve higher levels of income and value addition to the economy of the country. The role of the sector remains vital in shaping the lives of many thousands.

The contribution of the travel and the tourism sector of the national economy stood at 5.1% in 2016 and 2017. It is estimated that this will grow to the level of 6.6% by 2027 and the key factor is that with the increased global development, many of the emerging markets are likely to see a heavy trigger in tourism sector. Sri Lanka is placed maximum to benefit from the diversified landscape and value offer as well as having the appropriate infrastructure in place for the tourists to receive a sophisticated travel experience to the country. Thus, the country is set to benefit from the global emerging trends in the context of tourism.

The following chart indicates the details of the tourist arrivals to the country during the last two years.

Figure 1 – Tourist arrivals to Sri Lanka in past 2016 and 2017 periods (Sri Lanka Tourism Development Authority, 2018)

The arrivals. Of the tourisms in 2017 was 2.17 million and this was up from 2.05 million in 2016. This year, there was a moderate growth of 3.2%. the main concern is that the global tourism has also seen a moderate growth during the period at around 3.9%. It could be seen that while the country is likely to see higher levels of demand in the future, the country has to have the right kind of infrastructure in place to attract the tourists that are required. This is the reason that the foreign direct investments as well as the internal investments in the sector remains important.

The foreign direct investments to the sector is vital. the current sector significance has to be maintained and improved in order for the country to be competitive in this market. The country has to have the service environment that is attractive to tourists who intend to visit the country in the future. Thus, the role of the tourism and the activities involved with these aspects remain important for the country. The following chart indicates the direct investments that the sector has received in terms of the foreign investments.

Figure 2 – Foreign direct investments to tourist sector (Central Bank, 2017)

The above chart indicates that the actual foreign direct investment flows for the sector has started from 2014 onwards. The sector has seen a modest growth of 1% in 2014 and a massive growth of 166% in 2015. However, this was met with a decline of the investments by 22% in 2016. This shows that while the country has a very high level of potential for the attracting of the foreign direct investments to the sector, the country has not been able to do so within the past few years. This could be mostly attributed to the global market issues rather than any internal problems that the sector is likely to face detrimental outcomes.

2.0 Purpose of the paper

The purpose of the paper is to use the limited available data to identify if there are ay conclusive evidences to relate the financial performance of the sector to the triggering of the foreign direct investment flows to the sector. The general investment criteria are such that with higher demand for a sector, it is likely that the investments are likely to be high. This is due to the fact that the overall profit generating potential of the companies in these sectors will be high. Naturally, the increase of the tourist arrivals to the country indicates that the country is seeing higher demand for the hotels and the related services. Thus, naturally the investments have to flow in to improve these areas.

Sri Lanka currently has around 19,000 hotel rooms and the supply have to continue to grow; the current hotel occupation ratio on average is around 75%-80% in many instances and this highlights an average to high level of occupation. Thus, the country has to make sure that they continue to develop the needed infrastructure to improve the overall industry outlook and to achieve the needed beneficial results in the future context. The country continues to see growth in the sector and the supply of the rooms at around 4.0% in 2016. However, it is important that the performance of the sector is driven by the increase of the demand and the investments to this sector are driven by this continuous natural growth of the sector. This will allow the sector to be able to maintain the margins and other financial indicators while continue to grow and gain benefits in line with the market expectations.

In order to evaluate the nature of the relationship between the sector growth and the outcomes, the following conceptual framework is used in the context of the study.

Figure 3 – Conceptual framework (author developed)

The study evaluates the nature of the relationship between various variables and how these variables would eventually impact the attractiveness of the foreign direct investments. The following table indicates as to how the study operationalize these variables that has been identified in this instance.

Required areasData collection mode
Industry and market attractivenessLog of Total Assets of the firmsSecondary
Change in Sales IncomeSecondary
Changes in Net cash flowSecondary
Value Added = Sales – Cost of Goods SoldSecondary
ROS, ROA, ROE/ROI,Secondary
WACC/ Minimum required rate of return of investment.Secondary
Reinvestment OpportunitiesLog of DPS (Dividend per share) & Dividend YieldSecondary
Tax rate on Dividend earnedSecondary
Log of Net cash generated from Investing activities or spending on asset purchasesSecondary
Industry cost structureLog Sales on Employee, value added on employee (Value added/ number of employees)Secondary
Log of Asset Turnover RatioSecondary
Liquidity in the industrySpread of share price = Bid Price –  ask priceSecondary
Total number of shares turnover per period/ Average number of shares outstandingSecondary

Table 1 – Operationalization of the concepts (author developed)

The data has been collected from the appropriate sources for the study; in this instance the annual reports are the best sources that are used for the secondary data. Where such data is not available in the annual reports, the study has used press releases and other industry related aspects that are important for the collection of the required data for the study. Then, appropriate ratios are calculated for the purpose of evaluating the results and the eventual insights are gained in these areas in detail.

The study has used the data available in the Colombo Stock Exchange hotels sector to identify 15 hotels that are suitable for the study. The list of the hotels used for the study are attached in the appendix section of the paper. These hotels are selected randomly so that there will be no sampling bias involved with the data collection process. The possible ratios are calculated in line with the above operationalization table to identify the performance of each hotel. Then they are averaged to identify the sector performance in detail.

The findings are then evaluated for identify the nature of the relationships between the variables. The above findings can be used where possible to evaluate the nature of the relationships between the variables and to reach conclusive results in terms of the relationships that are in place.

3.0 Findings

This is the section that would indicate as to how each of the variable results are like. It is important to evaluate the nature of each of these sectors and to reach a set of conclusive results in line with the objectives of the study.

3.1 Industry and market attractiveness

3.1.1. Total assets log

The hotel industry is generally an asset heavy industry. This means that the industry has to manage these assets appropriately for the purpose of generating of the required results. they have some of the prime real estates in the country that are located in attractive locations that will contribute to attracting of the foreign individuals to the country in the future. The following chart indicate the details of the asset availability of the industry.

Figure 4 – Average total assets available per hotel (research results)

The hotel sector has seen that the value of the assets they are holding continues to row. This is an indication that they are acquiring more investments to expand the business as well as improve the current facilities they have. The eventual result is that they will be able to see the growth of the asset base of the company. During the period of 2012, the asset base has seen a growth of around 25% while this has declined afterwards to below 10% single digit growth on average afterwards. There is negative growth in 2013 and 2015. It can be asset that the average asset value growth in 2017 was gradually recovering and reached 7%.

This shows that while there has been an aggressive growth within these companies in 2012 and 2013 periods, this is somewhat slowed down towards the current times. this could be due to the slowdown in the national economic growth as well as the global economic issues. The current market conditions of the world are not conducive for the growth of the global tourism and could highlights that the future growth trends could be sluggish, leading the companies to cut down on the infrastructure related investment growth.

3.1.2. Value added growth

The sector has to add value to the economy of the country. In order to calculate the value that is added by the sector to the economy of the country, the revenue net of the direct expenses has to be calculated. This shows the direct value addition that is used to cover the other expenses and generate profit in a firm. The details about the value addition and the related outcomes can be indicated as follows:

Figure 5 – Value added growth (research results)

The above chart indicates that from 2011 to 2012, the growth of this was 39% an then this has seen a correction of 4% within the next year. The growth was mostly at low single digit numbers even through the growth has reached 12% in 2016. In 2017, the growth was negative 1% and this indicates that the value added has not been consistent in the context of the growth during the past years. However, the sector value addition remained in a growth or stable model and did not see any major deterioration during the period either. This shows that the overall growth of the value remains an important area that would provide positive insights relate to these aspects.

3.1.3. Average sales growth

Naturally, the size and the resources of the hotels are different. However, average sales per hotel is a clear indication to the fact that the hotel has in the context of generating value to the customers. Thus, the average sales growth has been an area of importance for the hotel and would achieve positive benefits in terms of the outcomes that they seek to reach. The average sales growth is an indication to how the sales has changed in average per hotel. The following chart indicates these details related to the changes in the average hotel revenue generating capabilities.

Figure 6 – Average sales growth (research results)

The above chart also indicates that while the general trajectory of the sales is upwards, the growth trends are not consistent. For instance, while there was a 15% growth seen in 2012 which is large, this was followed by a 11% correction of the sales growth. Further, after 2013, the growth of the sales and the growth of the value added has seen the same trajectory of lower single digit growth except for 2016 where the growth was 12%. This inconsistent sales growth is primarily attributed to the global tourist industry related issues and the fluctuations that has been witnessed during the past few years. While the emerging markets are gradually gaining the top arrivals locations, it also can be seen that they are also hit by global economic issues and the arrival numbers remain highly stagnant over the past few years.

3.1.4. Summary growth details

The purpose of this section is to highlight the growth patterns in terms of the sales, value added and the assets of these companies. The char facilitates comparing of the patterns to identify if there are common resemblance in these patterns. The following chart indicates the details affiliated with this area.

Figure 7 – Growth pattern comparison (research results)

The above comparison indicates that there is a close resemblance of these three patterns. In other words, the growth of the sales will indicate that the assets will grow and so are the value added. Or in other words, it is possible that the investments in the various asset areas will indicate that the revenue of the company will grow and the result is that the value added will continue to grow. Thus, these three areas resemble similar patterns and could indicate the industry related changes that are taking place in this context.

3.1.5. Return generating formulae

The return generating formulae related to the discussion would indicate as to what are the steps that are taken in the context of the return generation. The return on sales (net margin), return on assets, return on equity as well as return on investments (long term debt and equity) are important aspects that should indicate the return generating capability of the hotel sector. It is important to note that in the usual cases, the return generating capability of the industry is a driving factor that leads to the attraction of the investments to the sector.

Figure 8 – Return generating capabilities (research results)

The above charts indicate that all the return generating aspects also follow a similar set of patterns. Further, after 2013, it can be seen that the industry attractiveness in general has been declining due to the lower capabilities of generating of the returns in the future. However, return on sales have seen an uptick in 2016 before declining in 2017. Thus, the overall return generating capability of the company has to continue to achieve the right results and maximize the benefits to the parties that are affiliated with these capabilities in the future.

3.1.6. Correlation analysis

The growth of the value generation, sales and assets indicate the growth front of the industry. The return generation capabilities in terms of the ROS, ROE, ROA and ROI indicate as to how attractive the industry in terms of the generations of the returns. It is possible to evaluate as to which extent are these areas linked with the foreign direct investments to the sector. Even through the data that is available is limited, within the period, the nature of the correlation of these factors can be as retained. All growth variables are averaged to reach an average growth variable while all return generating numbers are average to develop a variable that could represent return generation in the context of the return generating capabilities. The FDI numbers are considered as a percentage of the DGP details. The following table highlights the data summary for correlation.

FDI as a % of GDP0.002%0.001%0.001%0.002%0.002%0.000%

Table 2 – Correlation data summary (research details)

When growth and the FDI related investments are considered, the correlation score of 0.33 is obtained. This shows that there is a moderately strong relationship between the industry growth and the FDI trends. On the other hand, returns and the FDI relationship has obtained a score of -0.05 and this indicates that there is no relationship between the returns and the FDI inflow to the sector.

3.2 Reinvestment opportunities

This is another area that highlights as to how attractive the sector is. The dividends are a way that shows the payback of the investments to the investor. An appropriate level of investment will have to be considered in terms of reaching of the appropriate results in the future context. having the right kind of reinvestment opportunities remain vital to reach the intended benefits in the future context.

3.2.1 Dividend yield

The dividend yield would indicate as to the yield that is generated from the dividends related investments. This shows the dividends paid as a percentage of the share value.

Figure 9 – The dividend yield (research details)

The dividend yield has been increasing over the past few years on average. This shows that the companies are paying out more of the earnings. While the payout ratio could be small, this however indicates that the money that would have re-invested in the projects and the expansion activities are generally paid back to the shareholders of the hotels. This is an area of concern for the parties.

3.2.2. Dividends per share

The DPS figure indicates as to what level of dividends on average are paid per share; which is an over-generalization of the details as the share prices may change and the overall dividend payments also change depending on the hotel. However, it is clear that these details will indicate as to how the companies will be able to manage their finance aspects well. The following chart indicates the overall details.

Figure 10 – Dividends per share (research details)

It can be seen that the dividends per share has been increasing in the past; this also corresponds with the idea that the company is paying off the profits than trying to retain them for the re-investment needs. This shows that dividends remain one of the significant ways to providing returns to the shareholders who are involved with the project.

3.2.3. Dividends and FDI correlation

It is possible that when the hotels are paying off higher dividends, that is attractive to the investors. Thus, they could look to invest in such opportunities as they will be able to generate positive returns from the investment within a relative short period of time. the following data summary is prepared for the purpose of carrying out the required correlation analysis to identify the nature of the relationships between the variables that are in consideration.

Dividend yield0.
FDI as a % of GDP0.00%0.00%0.00%0.00%0.00%0.00%

Table 3 – Correlation summary data for dividend yield and DPS analysis (research details)

The analysis indicates that in the case of DPS, the score was negative 0.65 indicating a moderate to strong inverse relationship. This in other words indicate that higher the dividend payments, lower the FDIs. This shows that the FDIs related to this area has a long-term focus and if the hotels pay the dividends out, the investors consider that to provide long term negative outcomes. the same can be said about the tiled, the relationship is inverse and the score is 0.38 negative. This shows that higher the tiled, lower the preference of the investors to invest in the hotels. Thus, there is a clear and inverse relationship observed in this instance.

3.3 Cost structure

The organizations use two important aspects for the purpose of generating revenues; assets as well as the employees, are these areas. These resources have to be used for the generation of the needed results in terms of the right outcomes.

3.3.1. Employee turnover

The turnover per employee indicates as to how the employees generate returns and the asset turnover would indicate the ability of the assets to generate returns for the company.

Figure 11 – The employee revenue generating capabilities (research details)

The above chart indicates that until 016, the actual revenue generating capability per employee has increased. This is also true for the value generating capabilities However, this has decreased in 2017 and this decrease is attributed to the decrease of the revenue generating capability of the hotel sector. This could be linked with the modest growth of the tourism sector in 2017 compared with 2016. Thus, the employees have been able to drive growth and increasingly generate more value in the sector when the overall trend is considered.

3.3.2. Asset turnover

This shows the capability of the assets to generate returns for the organization. Having the right capabilities to generate the returns would eventually indicate that the results are likely to be in line with the needs of the efficiencies needs of the industry. Higher the turnover generation ability of the assets, higher the returns generated per assets that the investors will be investing in. the following chart indicates the details.

Figure 12 – Asset turnover ratio (research data)

This ratio indicates that while the employee turnover levels were increasing, the asset turnover levels were decreasing. This could be as a result of increased piling up of the non-productive assets in the sector. This is a reason for concern and the parties will need to make sure that this issue if effectively solved.

3.3.3. Correlation analysis

It is important to identify the nature of the relationship between these variables and the outcomes linked with the FDI for the sector. The following table highlights the summary of the data that are used for this analysis.

Asset turnover38%33%36%34%34%34%31%
Value added per employee       1,748,008       1,949,129       2,460,292       2,698,358       2,810,131       3,114,979       3,005,194
FDI as a % of GDP0.00%0.00%0.00%0.00%0.00%0.00%0.00%

Table 4 – Correlation analysis (research data)

It can be seen that between the asset turnover and the FDI, the correlation score was 0.44 and this highlights the fact that there is a positive relationship between these two variables in place. On the other hand, the relationship between the employee value generation and the FDI is negative. This means that the higher the employee value generation, lower the FDI has been. The score of 0.41 negative indicates a moderate to strong relationship between the variables.

4.0 Summary of the findings

The above discussions have indicated many different aspects related to the FDIs and how they are linked with the financial performance. The following table summarizes these aspects that are realized through the correlation analysis.

VariableAreasNature of relationship with FDIOutcomes
Industry attractivenessGrowthModerateHigher the growth, higher FDIs
ReturnsVery weakNo relationship
Re-investmentDividend yieldModerateHigher the yield, lower the FDIs
DPSModerate to strongHigher the DPS lower the FDIs
Cost structureAsset turnoverModerateHigher the asset turnover, higher the FDI
Value added per employeeVery weakLower the employee value added, higher the FDIs

Table 5 – Summary of the findings (research data)

Thus, the above table indicates that correlation is carried out and the nature of the relationships between the variables are identified. However, it is important to point out the fact that the analysis has only used few years for varying out the correlation analysis. These number of data points are not adequate for the purpose and this could distort the outcomes. This is one of the main limitations associated with the study. However, it can be identified that the FDIs that has bee. Received by the sector is linked with the various areas of the financial performance in different ways, This could be used for further evaluation of the investor point o view about the sector and how they expect to generate returns from the sector in the long term. These insights are likely to be useful in attracting of the investors to the hotel sector of the country in the future.


Sri Lanka Tourism Development Authority, (2018), Monthly Statistical Bulletin, http://www.sltda.lk/node/692, February, 2018.

Central Bank, (2017), Central bank Annual Report – 2016, https://www.cbsl.gov.lk/en/publications/economic-and-financial-reports/annual-reports/annual-report-2016, February, 2018.