Purpose Annual rates of rural hospital closure have been increasing since 2010, and hospitals that close have poor financial performance relative to those that remain open. This study develops and validates a latent index of financial distress to forecast the probability of financial distress and closure within 2 years for rural hospitals. Methods Hospital and community characteristics are used to predict the risk of financial distress 2 years in the future. Financial and community data were drawn for 2,466 rural hospitals from 2000 through 2013. We tested and validated a model predicting a latent index of financial distress (FDI), measured by unprofitability, equity decline, insolvency, and closure. Using the predicted FDI score, hospitals are assigned to high, medium‐high, medium‐low, and low risk of financial distress for use by practitioners. Findings The FDI forecasts 8.01% of rural hospitals to be at high risk of financial distress in 2015, 16.3% as mid‐high, 46.8% as mid‐low, and 28.9% as low risk. The rate of closure for hospitals in the high‐risk category is 4 times the rate in the mid‐high category and 28 times that in the mid‐low category. The ability of the FDI to discriminate hospitals experiencing financial distress is supported by a c‐statistic of .74 in a validation sample. Conclusion This methodology offers improved specificity and predictive power relative to existing measures of financial distress applied to rural hospitals. This risk assessment tool may inform programs at the federal, state, and local levels that provide funding or support to rural hospitals.