Sri Lanka’s corporate sector is confronting a growing debt-servicing challenge as rising revenues fail to protect businesses from shrinking profits, higher operating expenses and borrowing costs, according to the Central Bank of Sri Lanka’s latest assessment of financial stability.
The Financial Stability Review 2026 identifies a deterioration in the capacity of listed non-financial companies to meet interest payments from their earnings, highlighting a vulnerability that could become more consequential if financial pressures persist.
Of the 204 companies listed on the Colombo Stock Exchange examined by the CBSL, 37.7% reported an interest coverage ratio below one in the first half of 2026. This was an increase from 33.8% a year earlier. The ratio measures earnings before interest and tax against interest expenses; a reading below one indicates that a company’s earnings are insufficient to cover its interest bill.
The implications extend beyond corporate accounts. Companies struggling to meet interest payments may need to draw on cash reserves, sell assets, seek fresh financing or restructure existing obligations. Where these pressures become prolonged, lenders could face a greater risk of delayed repayments and deteriorating loan quality.
However, the report does not suggest that the entire corporate sector is in distress. Rather, it identifies concentrated weaknesses alongside continuing gains among other businesses.
Trading and distribution emerged as the most vulnerable sector, recording the lowest interest coverage ratio and the only sector-wide inability to cover interest costs from earnings. It also reported negative net profit relative to debt, indicating particular difficulty in generating profits against its borrowing burden.
Construction and engineering presented a different but equally important concern. The sector carried the highest debt-to-equity ratio while recording low profits relative to debt, leaving it comparatively exposed to adverse changes in earnings and financing conditions.
By contrast, food, beverage and tobacco and real estate recorded the strongest interest coverage, the highest profits relative to debt and relatively low leverage. These differences underline why corporate-sector risk cannot be judged by aggregate revenue figures alone.
The automobile sector’s 138.9% revenue surge following the relaxation of vehicle import restrictions illustrates the importance of policy changes and market conditions in shaping business performance. Yet strong sales do not automatically produce stronger balance sheets if inventory costs, distribution expenses, taxes and financing charges absorb the gains.
Across listed non-financial companies, revenue expanded 22% in the first half, but aggregate net profit fell 6.1% to Rs.137 billion. EBITDA declined 0.4%, reversing the strong operating-profit growth recorded a year earlier.
The CBSL also reported that finance costs as a share of average debt increased slightly amid higher market interest rates. For highly leveraged companies, this combination of weaker profitability and more expensive borrowing can narrow the room available to service existing obligations or finance new investment.
The findings carry implications for banks and other lenders, which must distinguish between temporary profit fluctuations and sustained deterioration in borrowers’ repayment capacity. Careful monitoring of companies with weak interest coverage, high leverage and declining operating margins will be important in identifying emerging credit risks.
For policymakers, the challenge is to preserve financial stability without restricting productive business activity unnecessarily. Better corporate disclosure, prudent lending assessments, stronger cash-flow management and measures that improve productivity could help contain vulnerabilities.
The central warning is that Sri Lanka’s improving corporate turnover has not translated into equally strong profitability. Unless earnings recover sufficiently to match operating and financing costs, financially weaker companies may face mounting repayment pressure, increasing the possibility that corporate-sector difficulties could eventually affect the wider financial system.
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