Determinants of Profitability: A Study on Flour Manufacturing Companies in Hosanna Town

Dereje Lemma Lalisho, Etsegenet Sintayehu

Abstract


Abstract

In Ethiopia the contribution of manufacturing companies to economic growth is so minimal as compared to agriculture and services sectors. They are experiencing low return which is an indicator of poor financial performance. However, to remain competitive in the globalized economy, having good financial performance is highly imperative. Therefore, this study is to identify the determinants of flour manufacturing companies’ profitability in Hosanna town. The explanatory variables used in this study were firm size, leverage, liquidity, fixed asset turnover, operating expense and sales growth rate. The dependent variables were ROA and ROE. The data was collected from 6 companies for period of 7 years from audited financial statements of the companies. Purposive sampling technique was used to select the sampled companies from the period of 2012-2018, consisting of 6 companies with 42 observations. Quantitative research approach was adopted. The panel regression was used to observe relationships among the dependent and independent variables. The data were analyzed using descriptive statistics, correlation analysis and multiple linear regression analysis. The results of panel least square regression analysis showed that all independent variables explain 74% and 80% of the variance on ROA and ROE respectively where significant at 5% levels. Further, firm size, liquidity and sales growth rate have statistically significant and positive impact on ROA and ROE. On the other hand, operating expense has a negative and statistically significant impact on ROA and ROE. However, the relationship for leverage and fixed asset turnover is found to be statistically insignificant. Based on the findings, the study recommends that flour manufacturing companies must work towards improving their liquidity ratio. Therefore, the manager should ensure that their firms have adequate liquidity levels and increase their size of firm. Firms should strive to reduce their operating expenses and improving sales growth rate because they have much influence in profit generation on both return on equity (ROE) and return on asset (ROA) as indicated by the regression results. Finally, further studies should incorporate external factors such as government tax regulation, GDP and inflation.

KeywordsProfitability, Firm Specific Variables, And Flour Manufacturing Companies

 


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