Topic: What Factors affecting the profitability of the firms
You can get the data from the organisation/company that you know. Alternatively, you can use the public data such as government data.
If you select the data from publicly available data rather that working on specific organisation/company, you need to search and come up with who might be the organisation that might be interested to your analysis and performed your analysis from the organization points of view. Therefore, you need to still write the problem definitions.
Major factors affecting the profitability of firms
There has been a continuous debate going on about the factors affecting the profitability of the firms. On one hand some scholars argued that the financial factors such as the assets, firm size, capital structure and other related factors(Salavou, 2002; Akpan and Riman, 2012; Akram, 2014; Ahmed, 2015; Hailu, 2015; Mistry and Savani, 2015; Goel, 2016). On the other hand some scholars argue that the along with the financial factors there are other nonfinancial factors which affect the profitability of the firms, such as the corporate governance and the business environment of the company where the firm is operating(Cheffins, 2011; Alzoubi and Hisyam Selamat, 2012; Akbar, 2015; Ali, 2016). The current research is aimed to examine the financial factors affecting the profitability of the firms. Five different firms has been selected for the analysis purpose. These firms include SKY plc, BAE plc, BP plc, SDN plc and British American Tobacco.
There are many factors which affect the profitability of a firm. The main motive of the all the firms (except the not for profit organization) is to maximize the profit. So, it is important to identify the factors which affect the profitability of the firm. If the firms are not able to identify those factors, it becomes very difficult for the firms to survive in the current competitive world. There are many factors which can be taken into consideration such as the capital structure of the firm, the performance of the employees, investment opportunities etc. However on the basis of the previous literature it has been found that the factors such as the debt, equity, firm size etc are the major factors(Akpan and Riman, 2012; Ahmed, 2015; Mistry and Savani, 2015). So, the current research is to examine the impact of such factors on the profitability of the selected firm. Other objectives of the research includes;
To examine the capital structure of the selected firm
To examine the impact of various financial factors on the profitability of the firm
To recommend on the basis of the results from the data analysis
Q1. What are the major factors affecting the profitability of the firm?
Q2. What is the magnitude of the effect of each factors on the profitability of the firm?
This section has been devoted to provide an overview about the existing research in the current field. Literature review will help the researcher to not only get to know what has already been studied in this research area but also to find the research gap. There has been many researches which were aimed to identify the major factors affecting the profitability of the firm. Some of the major researches and their findings are discussed below:
Magnitude of impact of each factor on profitability
(Mohammed, Kovan and Islam, 2017) examined the impact of the capital structure on the profitability of the firms taking into account the microfinance institution in Iraq. Using the secondary data from 171 employees in those institutions authors concluded that the proportion of equity on the microfinance institutions was increasing and the capital structure and profitability are significantly related. On the other hand a study by (Welch, 2011)identified different factors which may affect the profitability of the firm. These factors includes:
Political legal environment
Economic environment
Tide of the market
Unemployment
Social –cultural environment
Technological environment
On the basis of the results from the data analysis authors concluded that these external factors have also significant impact on the profitability. However the magnitude of the internal factors is higher than the external factors. Authors have used both the correlation and regression analysis to examine the impact(Supa Tongkong, 2012; Vergas1, Cerqueira1 and Brandão1, 2015).
Another study by (Wahab and Ramli, 2014) also conducted a study to identify the factors which affect the profitability of the firms. In this research the profitability of the firm was measured in terms of return on assets and the major factors identified were debt level, efficiency of the capital and the leverage of the firms. Author used regression analysis to examine the impact and the results from the statistical analysis show that these factors have significant impact on the return on assets. Furthermore in another study by (ONSOMU, 2014)examined the impact of some specific factors on the firms’ profitability taking into consideration the firms in the food sector. Secondary data was collected for the time period 2002 2006. The major factors taken into consideration for the analysis includes debt to equity ratio, growth, size of the firm and macroeconomic factors. Authors have used correlation, regression and granger causality test to examine the relationship between the dependent and the independent variables(In et al., 2012; Shukla et al., 2013).
So, on the basis of the literature review it can be said that the major techniques used to examine the impact of different factors on the profitability of the firms includes the correlation analysis, regression analysis and the granger causality between the variables. So in the current research also the regression and correlation analysis has been used. The granger causality requires more research and data, which can be used in future research.
Data collection
For the current research secondary data has been collected for five different firms namely the Sky Plc, British American Tobacco Plc, BAE plc BP plc and SDL LN Plc. The selection of the firms was based on the objectives of the firm and also the availability of the data. The data has been collected from the open source data base of Yahoo Finance as all the firms are listed on the stock market. The data for each firm was stored on excel for further analysis. The data has been collected for the time perioe 2007 2015(Hancock, 2009).
Overview of existing research in the field
Variables included
Dependent variable
Return on assets ( ROA)
Independent variables
Total debt
Total assets
Total liabilities
Share holders’ fund
Tobin’s Q
Current assets
Goodwill
Book value of the equity
Market value of the equity
Data analysis techniques
To analyze the collected data and address the research question proposed in the previous section following statistical techniques have been used:
Descriptive statistics:
The descriptive statistics is one of the widely used technique for every type of research which allows the researcher to have an overview of the data both graphically and numerically. In this case the mean and the standard deviation of both the dependent and independent variable has been calculated along with the graphical representation of the various variable which are important from the current research perspective(Saunders, Lewis and Thornhill, 2007, 2009).
Correlation analysis
Correlation analysis is used to examine the relationship between the two variable and the value of the correlation coefficient lies between +1 and 1. The correlation coefficient close to 1 shows that the two variable are strongly and negatively related. Similarly correlation coefficient close to +1 indicates the variables are strongly and positively related. In this case also the correlation analysis has been performed to examine the relationship between dependent and independent variables(Wooldridge, 2002).
Regression analysis
Another important technique used in the current case is the regression analysis. The regression analysis is used to examine the impact of the independent variable on the dependent variable. The impact is investigated based on the regression coefficient and the statistical significance is measured in terms of the t statistics and the standard error. The independent variable have positive impact on the dependent variable if the regression coefficient is positive and negative if the regression coefficient is negative(Wooldridge, 2002; McCarty and Hastak, 2007; Armstrong, 2012; Monem A Mohammed, 2014)
In this section the results from the data analysis has been presented. In the first section descriptive statistics for each firm has been presented separately followed by the correlation and regression analysis for all the firms
Sky Plc
For the Sky plc, the results shows that on total average assets was 6265.55 million whereas the average liabilities was 5414. This shows that on an average the assets are higher than the liabilities for Sky plc. The mean and standard deviation of all other variables are shown in the table below.
Mean 
SD 

Total current assets 
2363.333333 
915.786 
Total assets 
6265.555556 
3524.908 
Total current liabilities 
2260.333333 
792.2111 
Total liabilities 
5414.222222 
2568.915 
Total debt 
3094.555556 
1825.062 
Return on assets 
12.79333333 
7.092836 
Dividends paid 
377.2222222 
99.48087 
Total shareholders’ funds 
839.5555556 
1009.65 
Market value of equity 
12313.83333 
3100.776 
Figure 1 Total assets and Total debt for Sky plc
Data collection and variables included
The comparison of the total assets and total debt is also shown graphically in the above figure. The trend of the total assets and the total debt are moving in similar direction till 2014. However after 2014 the increase in the total assets is higher than the increase in the total liabilities indicating that the firm has performed well after 2014. However it can also be the case the firm reduced borrowing and raise funds from some other source(Hutchinson, 2010; Kirabaeva and Razin, 2013).
Figure 2 Total debt and shareholders’ fund for Sky plc
The capital structure of the firm can be seen from the trend of the debt and equity of the firm. As the figure suggests the debt is higher than the shareholders’ fund indicating that the debt equity ratio was always more than 1 for Sky plc(Awan, Rashid and ZiaurRehman, 2011; Mishra, 2011; Supa Tongkong, 2012).
Figure 3 Return on assets for Sky plc
Lastly the profitability of the Sky plc was measured in terms of return and assets and the results shows that the ROA has declined significantly during 2008, which is may be due to the global financial crisis of 200708. However after 2008 the company regain its returns and improved significantly after that.
The second company included in the analysis is the BAE plc and the descriptive statistics for BAE plc is shown in the table below. On an average assets are higher than the liabilities, however the gap is not so large. Similarly the average ROA is 3.87 which is considered to be good.
Mean 
SD 

Total current assets 
7035.667 
957.1149356 
Total assets 
22264.56 
2434.907858 
Total current liabilities 
9660.667 
1685.697556 
Total liabilities 
17850.44 
1840.262149 
Total debt 
3122.111 
425.5436066 
Return on assets 
3.874444 
2.339519775 
Dividends paid 
3394.11 
426.6686198 
Total shareholders funds 
4366.111 
1637.044856 
Market value of equity 
13608.02 
2212.547507 
Table 1 Descriptive statistics fof BAE Plc
Figure 4 Total assets and total debt for BAE plc
Results from the comparison of the total assets and debt shows that the assets are much higher than the total debt indicating the firm do not raise much fund through debt. However the gap is decreasing as the total asserts are declining and total debt is increasing.
Figure 5 Total debt and shareholders’ fund for BAE plc
The capital structure of BAE plc shows that shareholders’ fund was the major components till 2012, however the equity proportion was declining continuously and the debt portion is increasing rapidly. As a results the debt equity ratio was higher than 1 after 2013.
Figure 6 Return on assets for BAE plc
The return on assets trend in this case also suggests that the ROA was negative in 2009 which has increased significantly after that before declining in 2013. However in the recent time the ROA has increased again.
Statistical techniques used
The third firm is the BP plc and the descriptive statistics has been shown in the following table. Results show that the average assets is 268816 and the average liabilities is 162163 which shows that the assets are higher than the liabilities. Descriptive statistics of all other variables are shown in the table below.
Mean 
SD 

Total current assets 
86084.88889 
15840.89874 
Total assets 
268816.1111 
29877.4035 
Total current liabilities 
71429.66667 
10482.96967 
Total liabilities 
162163.3333 
19553.32407 
Total debt 
3122.111111 
425.5436066 
Return on assets 
4.825555556 
4.670929006 
Dividends paid 
6541.555556 
2671.796171 
Total shareholders funds 
7403.555556 
2009.995281 
Market value of equity 
148646.3333 
39234.41096 
Table 2 Descriptive statistics for BP plc
Figure 7 Total assets and total debt for BP plc
The comparison of the total assets and debt shows that total assets are much higher than the total debt of the firm for all time period.
Figure 8 Total debt and shareholders’ fund for BP plc
In terms of the capital structure the proportion of equity has been declining significantly and the proportion of debt is increasing. The gap is closing very fast. This indicates that the firm is relying on debt in the recent time.
Figure 9 Total return on assets for BP plc
SDN plc is the fourth firm included in the current research. Average assets is 269.84 whereas the average liabilities are 85.84. The average return on assets is 3.29, which is not very good as compare to the industry average. Descriptive results from other variables are also shown in the table below.
Mean 
SD 

Total current assets 
90.1 
18.15537 
Total assets 
269.8444444 
53.89808 
Total current liabilities 
76.31111111 
25.71816 
Total liabilities 
85.84444444 
25.16218 
Total debt 
6.877777778 
8.706862 
Return on assets 
3.298888889 
7.56257 
Dividends paid 
1.755555556 
2.233893 
Total shareholders’ funds 
344.8444444 
120.8768 
Market value of equity 
344.8444444 
120.8768 
Table 3 Descriptive statistics for SDN Plc
Figure 10 Total assets and total debt for SDN plc
The comparison of the assets and debt show that the assets are much higher than the total debt for the entire time period.
Figure 11 Total debt and total shareholders fund for SDN plc
The capital structure shows interesting facts. The shareholders’ fund is much higher than the total debt indicating that the firm rely more on equity than debt. However the shareholder’s equity also increase after 2008 and start declining after 2011.
Figure 12 Return on assets for SDN plc
The ROA figure suggests that there are negative returns on assets after 2012 which indicates the poor performance of the firm.
The last firm included in the analysis is the British American Tobacco and the results shows that the average assets are 26639.78 whereas the average liabilities are 19333.33. The return on assets is 12.12 on an average, which shows the good performance of the firm.
Mean 
SD 

Total current assets 
8557 
1306.842 
Total assets 
26639.78 
3335.939 
Total current liabilities 
7799.222 
1388.396 
Total liabilities 
19333.33 
3777.397 
Total debt 
11374 
2644.861 
Return on assets 
12.12 
1.813077 
Dividends paid 
2163.44 
582.1783 
Total shareholders’ funds 
5683.111 
2943.983 
Market value of equity 
53936.03 
12661.25 
Table 4 Descriptive statistics for British American Tobacco
Figure 13 Total assets and total debt for British American Tobacco
Total assets are higher than the total debt for all the time period and they are moving in similar pattern.
Results from data analysis
Figure 14 Total debt and shareholders’ fund for British American Tobacco
The proportion of debt is higher as compared to the proportion of equity indicating that the firm rely heavily on debt as compared to equity.
Figure 15 Return on assets for British American Tobacco
The ROA has been over 10 for the entire time period indicating strong financial performance of the firm.
In this section the results from the correlation analysis has been shown and the results show that ROA has positive correlation with dividend , shareholders’ fund market value of the equity and total debt. All other variables included in the analysis are negatively correlated to the dependent variable.
TA 
CL 
TL 
debt 
ROA 
div 
SF 
MVE 
Goodwill 
BE 
tobin 

TA 
1 

CL 
0.984749 
1 

TL 
0.99847 
0.986416 
1 

debt 
0.04712 
0.05101 
0.02834 
1 

ROA 
0.18589 
0.17416 
0.19206 
0.423485 
1 

div 
0.75606 
0.7681 
0.7533 
0.11217 
0.121874 
1 

SF 
0.606339 
0.648133 
0.612847 
0.386531 
0.043674 
0.71465 
1 

MVE 
0.892932 
0.913957 
0.888293 
0.188402 
0.019023 
0.82166 
0.738533 
1 

Goodwill 
0.534125 
0.548638 
0.552526 
0.548408 
0.02881 
0.70676 
0.783608 
0.584673 
1 

BE 
0.986971 
0.964162 
0.978313 
0.14693 
0.1822 
0.71105 
0.529706 
0.872997 
0.408401 
1 

tobin 
0.52224 
0.53137 
0.5278 
0.346123 
0.60445 
0.51797 
0.32413 
0.30058 
0.42592 
0.48726 
1 
Table 5 Results from the correlation analysis
The results from the regression analysis are shown in this section. The results from the summary statistic shows that the R squared is 0.51 indicating that 51 % of the variation in the dependent variable is due to the independent variables included in the study.
SUMMARY OUTPUT 

Regression Statistics 

Multiple R 
0.717847442 
R Square 
0.515304951 
Adjusted R Square 
0.343335818 
Standard Error 
5.190428024 
Observations 
45 
Table 6 Results from the summary statistics
Similarly the results from the ANOVA shows that the F statistics is statistically significant as the p value is less than 0.05. This indicates that the cumulative impact of independent variable on dependent variable is statistically significant.
ANOVA 

df 
SS 
MS 
F 
Significance F 

Regression 
11 
973.8251667 
88.52956061 
3.614719882 
0.002028094 

Residual 
34 
915.9784644 
26.94054307 

Total 
45 
1889.803631 

Coefficients 
Standard Error 
t Stat 
Pvalue 
Lower 95% 
Upper 95% 
Lower 95.0% 
Upper 95.0% 

Intercept 
3.683648364 
3.441140532 
1.070473097 
0.291947037 
10.67688731 
3.309590587 
10.67688731 
3.309590587 
CA 
0.000101422 
0.000327727 
0.309472857 
0.758850589 
0.000767443 
0.000564598 
0.000767443 
0.000564598 
TA 
0.000355005 
0.000587833 
0.603922302 
0.549903901 
0.000839614 
0.001549625 
0.000839614 
0.001549625 
CL 
0.000675487 
0.000362843 
1.861653302 
0.071315041 
6.18978E05 
0.001412873 
6.18978E05 
0.001412873 
TL 
0.000756285 
0.000648368 
1.166443888 
0.251551842 
0.002073929 
0.000561358 
0.002073929 
0.000561358 
debt 
0.00090552 
0.00053348 
1.69738355 
0.098761197 
0.000178641 
0.001989681 
0.000178641 
0.001989681 
div 
0.000544497 
0.000992156 
0.548801255 
0.586728047 
0.002560801 
0.001471808 
0.002560801 
0.001471808 
SF 
4.9429E05 
0.000505875 
0.097709889 
0.922736416 
0.000978633 
0.001077491 
0.000978633 
0.001077491 
MVE 
0.000125072 
8.52552E05 
1.467029971 
0.151557609 
0.000298331 
4.81875E05 
0.000298331 
4.81875E05 
Goodwill 
0 
0 
65535 
#NUM! 
0 
0 
0 
0 
BE 
4.66863E05 
0.000509888 
0.091562053 
#NUM! 
0.00098953 
0.001082902 
0.00098953 
0.001082902 
tobin 
6.340633086 
1.97744935 
3.20647054 
0.002923238 
2.321972502 
10.35929367 
2.321972502 
10.35929367 
Table 7 Results from the regression analysis
The results from the regression coefficient show that the total assets, total debt and shareholders’ fund have positive impact on ROA. All other variables have negative regression coefficient indicating negative impact on ROA. However only the coefficient of debt is statistically significant, that is also at 90 % confidence level. This shows that debt level is one of the most important factors affecting profitability of the firms.
On the basis of the results from the data analysis following recommendations can be made:
The capital structure of the firm is one of the most important factors affecting profitability of the entire firm, so the firms should make the balance between both debt and equity while raising the fund
Total liabilities shows negative impact on the profitability so firms try to reduce the total liabilities
The ROA for most of the firms are lower than the industry average, so the firms should invest more wisely.
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