Preview

European Journal Of Business And ManagementISSN

Powerful Essays
Open Document
Open Document
4630 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
European Journal Of Business And ManagementISSN
European Journal of Business and Management
ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online)
Vol.5, No.27, 2013

www.iiste.org

Factors determining Profitability: A Study of Selected
Manufacturing Companies listed on Colombo Stock Exchange in
Sri Lanka
N.Sivathaasan
Asst. Librarian, University of Jaffna, Sri Lanka
Email: sivathas27@gmail.com
R.Tharanika
University of Jaffna, Sri Lanka
Email: rajatharanika@yahoo.com
M.Sinthuja
University of Jaffna, Sri Lanka
Email: sinthujamuthulingam@gmail.com
V.Hanitha
University of Jaffna, Sri Lanka
Email: hanithavijeyaratnam@yahoo.com
Abstract
This paper aims to investigate whether factors such as capital structure, working capital, firm size, non-debt tax shield and growth rate, determining profitability have any impact on profitability of selected manufacturing companies listed on Colombo stock exchange, Sri Lanka over a period of five years from 2008 to 2012. This study employs multiple regression analysis to measure relationship among variables, individual and overall impact on profitability and to test the operational hypotheses. The results revealed that whereas all independent variables explain 76.6% and 84.7% of the variance on ROA and ROE respectively where significant is at 5% levels, the overall model has a significant impact on profitability at the rate of 80.5 % (Adjusted R2 = 80.5%,
P<.0.05). Further, while capital structure (+) and non-debt tax shield (+) have statistically significant impact on profitability (P < 0.05), the remaining working capital (+), growth rate (-) and firm size (+) have no significant effect on the profitability (P > 0.05).
Keywords: Profitability, Determinants of Profitability, Colombo Stock Exchange
1.
Introduction
Profitability has been given considerable importance in the finance and accounting literatures. According to Hifza Malik, (2011), Profitability is one of the most important objectives of financial management since one goal of financial management is to maximize the owners’



References: - Amato, L., & Wilder, R. P. (1985).The Effects of Firm Size on Profit Rate in U.S. - Ahmed, N., Ahmed, Z., & Ahmed, I. (2010). Determinants of Leverage of Automobile Sector Firms Listed in Karachi Stock Exchange by Testing Packing Order Theory - Amir Shah, S.M, & Sana. (2006). Impact of Working Capital Management on Profitability. - Booth, L., Aivazian, V., Demirg, A., Kunt, U.C. & Maksimovic, V. (2001). Capital structures in - Bradley,B., & Michael, R.J. (2002). Trade Credit and Small Businesses: A Cause of Business Failures? [Online] - Bradley, M., Jarrell, G. A., & Kim, E. H. (1984). On the existence of an optimal capital structure: theory and evidence - Carpenter, M.D., & Johnson, K.H. (1983). The Association between Working Capital Policy and Operating Risk - Dong, H. Ph., & Jhy-tay, S. (2010).The Relationship between Working Capital Management and Profitability - Demsetz, H., & Villalonga, B. (2001). Ownership structure and corporate performance. Journal of Corporate Finance, 7(3), 209. - Denis, D.J., & Denis, D.K. (1994). Majority owner-managers and organizational efficiency. Journal of Corporate Finance, 1(1), 91. ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online) Vol.5, No.27, 2013 Frank, M.Z., & Goyal, V.K. (2004). The effect of market conditions on capital structure adjustment. Gugler, K., Mueller, D.C., & Yurtoglu, B.B. (2004). Corporate governance and the return on investment Hall, M., & Weiss, L. (1967). Firm’s size and Profitability. The Review of Economics and Statistics, August, 319–331. Hijazi, S.T., & Tariq, Y.B., (2006). Determinants of Capital Structure: A case of Pakistani Cement Industry Hair, J.F. Jr., Anderson, R.E., Tatham, R.L., & Black, W.C. (1998). Multivariate Data Analysis, (5th Edition) Hifza, M. (2011). Determinants of Insurance Companies Profitability: An Analysis of Insurance Sector of Pakistan Hoy, F., Mcdougall, P.P., & Dsouza, D.E. (1992).Strategies and environments of high-growth firms”, in D Jensen, M. C. (1986). Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers. Jensen, M., & Meckling, W. (1976). Theory of the firm: Managerial behavior, agency costs, and ownership structure Jong, D., & Van, D. (1998). Determinants of Leverage and Access to Credit: Evidence on Western and Eastern Europe countries. Keith, G. (1998).Determinants of growth and profitability in small entrepreneurial firms. International Journal of Entrepreneurial Behavior & Research, 4 ( 1), 18 - 27 Kleinbaum, D.G., Kupper, L. L., & Muller, K. E. (1988). Applied regression analysis and other multivariate methods Lalith, I.S. (1999). The capital structure of Sri Lankan companies. Sri Lankan journal of management, 4(1). Lehmann, E., & Weigand, J. (2000). Does the Governed Corporation Perform Better? Governance structures and corporate performance in Germany Lujie, C. (2007). Determinants of Capital Structure: An Empirical Study from UK Firms. UK: The University of Nottingham Macmillan, I. C., & Day, D. L. (1987). Corporate Ventures into Industrial Markets: Dynamics of Aggressive Entry Marcus, M. (1969).Profitability and Size of firm. Review of Economics and Statistics, February, 104– 107. Menard, S. (1995). Applied logistic regression analysis. Sage University paper series on qualitative applications in the social sciences, 07-106 Mendenhall, W., & Sincich, T. (1993). A Second Course in Business Statistics: Regression analysis. Modigliani, F., & Miller, M. (1958). The cost of capital, corporation finance and the theory of investment Myers, S. & Majluf. (1984). Corporate financing and investment decisions when firms have information that investors do not have Myers, R. (1990). Classical and modern regression with applications (2nd ed.). Boston, MA: Duxbury. Narware, P. C. (2004). Working capital and profitability – An empirical analysis.The Management Accountant, 36(6), 120-127. Nilufar, A., Zaini,A., David, Y.G.F., & Syed, S.A. (2009). A study of Job Stress on Job Satisfactation among University Staff in Malaysia: Empirical Study Ofek, E., & Stulz. (1996). Leverage, Investment, and Firm Growth. Journal of Financial Economics, 40, 3-30. Pandy I.M. (2005. Financial Management (10th ed.). Vikas Publishing House Pvt Ltd.

You May Also Find These Documents Helpful

  • Good Essays

    Cango Financial

    • 1115 Words
    • 5 Pages

    The success of a business depends on its ability to remain profitable over the long term, while being able to pay all its financial obligations and earning above average returns for its shareholders. This is made possible if the business is able to maximize on available opportunities and very efficiently and effectively use the resources it has to create maximum value for all involved stakeholders. One way the performance of a company can be measured on critical areas such as profitability, its ability to stay solvent, the amount of debt exposure and the effectiveness in resource utilization, is performing financial analysis where a set of ratios provides a snapshot of company performance and future prospects. Financial analysis is also a very useful technique that forms a basis for making key decisions about company operations. In addition to internal company members, these ratios are used by potential investors and shareholders to make investment decisions about the company.…

    • 1115 Words
    • 5 Pages
    Good Essays
  • Satisfactory Essays

    chipostle

    • 351 Words
    • 2 Pages

    operating performance? Use the financial ratios in Table 4.1 of Chapter 4 as a guide in doing the calculations…

    • 351 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    The analysis for 2011, the company had 1.62 times and for 2010 it had 1.66 times. This means the company is making good use of assets to generate revenue. For profit margin, the company’s profitability increased slightly from 4.30% to 4.97%. Return on assets, which measures the efficiency of a business in using its assets to generate net income increased from 7.16% to 8.05%. Return on common stockholders’ equity increased by 3.02% from 2010 to 2011 that indicates the company has enough money to pay common shares, dividends, and retain funds for business growth.Profitability Ratio is very important information for Investors, customers, managers, andgovernmental…

    • 693 Words
    • 3 Pages
    Good Essays
  • Powerful Essays

    In analyzing the strengths and weaknesses of a company, the first thing that potential investors tend to look at is, quite simply, profitability. As well as being an important facet of company performance that is particularly…

    • 1640 Words
    • 7 Pages
    Powerful Essays
  • Good Essays

    1. The financial performance of a company can be determined by analyzing different financial ratios. The Horniman’s company financial performance looks strong and healthy if one looks at their 2005-projected financial summary net profit of 60.8 thousand dollars. Also they have a steady growth and increase from 2002 to 2004 in their revenue, profits and assets. In addition, Exhibit 2 demonstrates that all but one financial ratio supersede the benchmark for other horticultural producers. However, someone like Warren Buffet might look at their cash flow balance and determine that the financial performance of the company is poor. A company may seem profitable on paper but may not have liquidity due to low cash balance. A company must realize that there is a difference between cash flow and accounting profits. In the case of the Horniman’s the financial performance appears healthy but they do not have enough cash flow to liquidate their liabilities.…

    • 557 Words
    • 3 Pages
    Good Essays
  • Good Essays

    3. Why did Superior improve profitability during the period January 1 to June 30, 2005? How useful was the data in Exhibit 4 for the purpose of this analysis?…

    • 473 Words
    • 2 Pages
    Good Essays
  • Good Essays

    primark

    • 2373 Words
    • 10 Pages

    According to figure 1 (page 2), figure 2 (page3) and table 1 in appendix. We can see although the revenue and adjusted operating profit are increase considerably. As the matter of fact, the operating profit in 2008 is declined from 12.1% to 10.9% and the…

    • 2373 Words
    • 10 Pages
    Good Essays
  • Powerful Essays

    Although these assumptions made by MM are unrealistic, they have indicated and provided us clues on what is required for capital structure to be relevant and what affects a firm’s value. (Brigham et al, 2004)…

    • 5736 Words
    • 23 Pages
    Powerful Essays
  • Best Essays

    Hackbarth, D. (2008). Managerial Traits and Capital Structure Decisions. Journal of Financial and Quantitative Analysis, 43(4).…

    • 2070 Words
    • 9 Pages
    Best Essays
  • Powerful Essays

    When it comes to business decisions, there are many ways to analysis the financial status of a firm. What guidelines determine profit margin? Who uses these guidelines? How is profit used to analysis a firm and its business decisions? This paper will discuss two terms that are used to define profit: accounting profit and economic profit. The first term is called accounting profit which uses the equa-tion.…

    • 1010 Words
    • 5 Pages
    Powerful Essays
  • Satisfactory Essays

    Economics

    • 473 Words
    • 2 Pages

    References: * The information was analyses and utilized by the class book Managerial Econimics by Mark Hirschey 10 edition in Chapter .3…

    • 473 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Tax is the only imperfection (MMII theory assumption)The assets of the comparable companies have the same risk as the asset to be evaluated here We are going to maintain and implement a constant debt-to-equity ratio…

    • 690 Words
    • 3 Pages
    Satisfactory Essays
  • Powerful Essays

    Teece. (1982). Towards an economic theory of the multiproduct firm. Journal of Economic Behavior and Organization,…

    • 22220 Words
    • 106 Pages
    Powerful Essays
  • Powerful Essays

    The topic I selected for my thesis is: “The business and financial performance of an organization over a three year period” I selected this area for my research as analyzing the financial aspects of company will brush up on my analytical skills. Before starting to work on this thesis, I knew that during this research, I will dig up to discover some innovative stuff. Being a chartered accountancy student, I am highly interested in analyzing the financial situation of different companies. The objective of this thesis is to analyze a company on financial grounds as well as carry out a brief industry and economic analysis. This involves the analyzing various financial aspects, like liquidity, profitability, growth, etc. My research thesis provides a similar evaluation of Motorcycle Industry in Pakistan, Atlas Honda Limited. The reason to select this company is very straightforward; Atlas Honda is one of the famous brands and leading motorcycle companies in Pakistan. It is considered to be well amenable to laws and regulations. It is a dynamic growth oriented company through market leadership, excellent in quality and service. They are fostering a network of engineers and researchers, who ensures unique contribution to the development of the industry. The second reason for the selection was the availability of well designed annual reports and useful industry related data that helped in the analysis. One of the most important tools used in the analysis of financial position of Atlas Honda is the financial ratios. Calculation and interpretation of financial data underpins this thesis. These financial ratios and other financial data are…

    • 7206 Words
    • 29 Pages
    Powerful Essays