Assignment # 01
Student Name: Pervaiz Abdul Jalil
Code:
Course: AnalysisFinancialStatemet
Instructor: Miss Nousheen
Student ID/Program: 15274 MBA
Class:
Max. Marks:
Date:
MBA
19th Mar 2021
SUMMARY:
The ability of managers to recognize certain elements that can contribute to improved profitability
determines their quality and performance. Profitability is characterized as a company's earnings
derived from sales after all expenditures incurred within a given period have been deducted.
The majority, if not all, businesses understand the definition and value of profitability, but they do not
know how to improve it or what factors influence profitability. This is more apparent during a crisis;
some firms seek to protect their financial standing by taking unconventional steps, but due to a lack of
expertise and high costs, these efforts are more likely to backfire.
A business that is not profitable will not succeed, and a business that is highly profitable will be able to
reward its investors with high returns on their investment. Companies who want to achieve consistent
profitability must understand the internal and external factors that can affect profitability.
Profitability is the primary concern of Malaysian publicly traded firms, as well as other relevant
parties. However, there have been very few studies conducted in Malaysia, and the focus has mainly
been on two sectors: construction and banking. Ramasamy, Ong, and Yeung (2005); Narware P.C.
(2010); San and Heng (2011); Razak and Ali Ahmed (2008); and Salim Yadav (2008) are examples of
these studies (2012). Nonetheless, both of these studies have emphasized the value of microeconomic
profitability.
In today's economy, where fierce competition reigns supreme and all processes are heavily reliant on
data (Alarussi et al., 2009), a company's performance necessitates complex metrics and management
structures.
A business must systematically evaluate its financial result, or in other words, analyze profitability, to
comply with the theory of rational economics. Parkitna and Sadowska (2011) stated that when
assessing a business entity's profitability index, it is critical to use a variety of numerator and
denominator variants to obtain more knowledge about the organization.
There's no denying that productivity is the key to increasing income. Efficiency may apply to
individual activities or the whole organization. Innocent et al. (2013) investigated the pharmaceutical
industry's profitability in Nigeria for 11 years, from 2001 to 2011.
Profitability has a negative and negligible relationship with debt turnover ratio, borrower velocity, and
total assets turnover ratio, according to the findings. The inventory turnover ratio has a negative but
substantial relationship with profitability. Al Omari and Warrad (2015).
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Assignment # 01
Liquidity refers to a company's ability to turn an asset into cash rapidly. It can also be characterized as
a company's ability to meet its short-term obligations. A variety of ratios, such as the current ratio, fast
ratio, and cash ratio, are used to determine liquidity.
Liquidity is necessary for a successful company. From 2001 to 2008, Bhayani (2010) researched the
factors that affect cement company profitability. He came to the conclusion that liquidity, the firm's
age, the operating ratio, the interest rate, and inflation were all important factors.
Working capital and operating efficiency have been related in several studies (for example, Barine,
2012). As the coefficient t-value = 1.24 and P 0.05 reveal, there is a positive and important relationship
between working capital (WC) and EPS in the current analysis. In the first mode, this relationship does
not extend to ROE. As a result, working capital has a positive relationship with EPS but not with ROE.
As a consequence, the second possibility cannot be ruled out. The rational explanation for this
relationship is that more working capital (debt or equity) would lead to higher EPS but not necessarily
higher ROE. Grinyer and McKiernan (1991), Chowdhury and Amin (2007), Malik (2011), and Alipour
(2011) found similar findings of a major relationship between working capital management and
profitability (2011).
In terms of liquidity, the study's findings reveal surprising results. Although it was expected that
liquidity and profitability have a positive relationship, the findings show no significant relationship
between current ratio (CRIO) (a measure of business liquidity) and either ROE or EPS. This is due to
the fact that profitability is unaffected by cash flow, and liquidity is relevant in financial institutions
such as banks but not in non-financial businesses. Liquidity is used by banks to finance their existing
obligations (excluding shareholders).
As a result, the third possibility is ruled out. Pratheepan (2014) observed similar results when he used
static panel models to evaluate the determinants of profitability for 55 Sri Lankan manufacturing
companies and discovered that liquidity has no effect on profitability.
In the first model, the coefficient t-value = 4.3933 and P 0.001 indicate a positive and important
relationship between assets turnover ratio (ASTORIO) (as a measure of business efficiency) and ROE.
In the second model, this relationship does not apply to EPS. As a result, ASTORIO has a positive
relationship with ROE but not with EPS. Consequently, the The fourth theory is unrejectable. The
explanation for these findings may be that the assets turnover ratio and the return on equity (ROE) both
calculate company performance, but EPS does not.
The aim of this research is to identify the factors that affect profitability in Malaysian publicly traded
companies. Five independent variables were empirically analyzed for their relationships with
profitability: business size (as calculated by overall sales), working capital, company productivity
(assets turnover ratio), liquidity (current ratio), and leverage (debt equity ratio and leverage ratio). Data
was collected from annual reports of 120 companies listed on Bursa Malaysia for the period 2012 to
2014, and Pooled OLSRegression was used to analyze the data. The findings indicate that gross
revenue, working capital, and asset turnover ratio all have good positive relationships with
profitability. There are also negative relationships between debt equity and leverage ratios and
profitability, according to the findings. Liquidity does not seem to have a strong connection to
profitability. The study concludes that large rising companies with well-managed assets have higher
operating profits and, as a result, higher profitability.
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