Fertilizers Firms: Analysis of Companies in Pakistan

Published: 2021-09-15 08:40:09
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Category: Strategy, Asia

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Introduction
The performance of a firm can be dignified by applying different methods. One of the methods for firm performance is financial analysis in which we use profitability ratios to measure the overall efficiency and performance. Previous studies observed various variables they may affect the firm performance and the success of a firm mostly depends upon profitability. In this research study we will find the effect of size of a firm, financial leverage, Asset turnover, sales growth and financial debt ratio on profitability of the listed fertilizers firms in Pakistan.The size of a firm is the amount and variety of production capacity and ability a firm possesses or the amount and variety of services a firm can provide concurrently to its customers. The firm size is basic factor in determining the profitability of a firm due to the concept known as economies of scale which can be found in the traditional modern classical view of the firm (J. Aloy Niresh & T. Velnampy 2014). It reveals that contradictory to smaller firms, items can be produced on much lower costs by bigger firms. In accordance with this concept, a positive relationship between firm size and profitability is expected. Contrary to this, alternative theories of the firms advise that larger firms come under the control of managers pursuing self-interested goals and therefore managerial utility maximization function may substitute profit maximization of the firms’ objective function.
In defining the business success of a firm, profitability plays good role. It is the amount of money a firm can produce with whatever resources the firm has. The goal for any organization is to maximize(increase) its profitability. Subsequently, firms can increase the benefits associated with the increased profitability.
Fertilizer plays a very important role in the production of crop. No country is able to increase productivity of agricultural without expending the fertilizer firms. According to economic survey 2015-2016 conducted by Economic Adviser’s Wing, Finance Division, and Government of Pakistan in Pakistan 42.3 percent labor force are involved in agriculture. Agriculture contributes 19.8 percent in Gross Domestic Product (GDP). So this study is about Pakistan, so in Pakistan fertilizer sector is very important in the economy. This study will identifies the impact of firm size, financial leverage, asset turnover, sale growth and financial debt ratio on profitability in the listed fertilizer firms in Pakistan.
Significance of the study
The result of this study will be present firm size, financial leverage, Asset turnover, sales growth and financial debt ratio impact on profitability in listed fertilizer firms in Pakistan. Identify the profitability and firm size in listed fertilizer firm in Pakistan. Demand of the fertilizer industry is directly aligned with growth in agricultural sector. According to economic survey 2015-2016 conducted by Economic Adviser’s Wing, Finance Division and Government of Pakistan. Agriculture sector is a vital component of Pakistan’s economy as it provides the raw materials to down the line industries and helps in poverty alleviation. This sector contributed 19.8 percent in GDP and it remains by far the largest employer absorbing 42.3 percent of the country’s total labor force. The results would be worth full for fertilizer firms in a Pakistan, such as they will know that how much these factors are important for them in increasing profitability. If these fertilizer firms become profitable, the agriculture of Pakistan will be developed indirectly. This study is also useful for all investors who want to invest in fertilizer sector in Pakistan.
Aim of study
The aim of this study is to investigate the impact of firm size, financial leverage, asset turnover, sales growth and financial debt ratio on profitability in a listed fertilizer firms in Pakistan. Fertilizer sectors are the one of the most important sector in Pakistan industrial manufacturing sectors. In Pakistan 42.3 percent of labor force are involved in agriculture. So in an agro-base country fertilizer firms play a vital role in its development. Main aim of this study is to find of the affect above variables on profitability and to give some suggestions on the basis of our results.
Research Question
Profitability of a firm can be affected by different factors. This study will be design to answer the following Questions.
What is impact of firm size on profitability in a listed fertilizer firms in a Pakistan?
Does profitability influenced by the financial leverage?
Does the effect on profitability of asset turnover?
Does the financial debt ratio have an influence on profitability?
Does any relationship exist between sales growth and profitability?
Objectives of the study
In order to achieve the aim of this study the objectives will be,
To find the impact of size of firm on profitability in a listed fertilizer firms in Pakistan.
To investigate the effect of financial leverage on profitability in a listed fertilizer firms in Pakistan.
To understand the impact of asset turnover on profitability in a listed fertilizer firms in Pakistan.
To explore the impact of financial debt ratio on profitability in a listed fertilizer firms in Pakistan.
To examine the effect of sales growth on profitability in a listed fertilizer firms in Pakistan.
To suggest some recommendations on the basis of results.
Delimitation of the study
The focus of this research study will be to address effect of firm size, financial leverage, asset turnover, financial debt ratio and sales growth on profitability of listed fertilizers firms in Pakistan. Various factors affect profitability but this study will be only specific to the firm size, financial leverage, asset turnover, financial debt ratio and sales growth impact on profitability in listed fertilizer firms in Pakistan. The limitations of the study are the usage of the data belonging to the years 2011 to 2015 and only the firms in Karachi Stock Exchange (KSE) operating in the fertilizer sector have been included.
Literature Review
There are many past research studies measuring the impact on profitability but have varying views. This study also identifies the impact on profitability in different view. There are a lot of variables that have impact on profitability. This study will shows the impact of firm size, financial leverage, asset turnover, sales growth and financial debt ratio on profitability in a listed fertilizer firms in Pakistan. The related literature is here under.
The part that firm size plays in profitability was examined by Lee (2009) who used fixed effect dynamic panel data model and performed analysis on a sample of more than 7000 US publicly held firms. According to him absolute firm size plays a remarkable role in explaining profitability.
K. Satish et. al (2016) integrates findings of previous studies regarding the impact of working capital management (WCM) on firm profitability. The results of meta-analysis support the traditional view that an aggressive WCM policy leads to higher profitability. Overall, and in all the subgroup studies, the cash conversion cycle (CCC) is found to be negatively associated with profitability. This association is however not found to be statistically significant in all the cases and also differs in terms of magnitude. By and large, using meta-analysis did not find any significant association between the CCC and profitability.
Afrifa, G.A and P. Kesseven (2015) employ panel data regression analysis on a sample of 160 Alternative Investment Market (AIM)-listed SMEs for the period from 2005 to 2010. The empirical results show that there is a concave relationship between working capital level and firm profitability and that there is an optimal working capital level at which firms’ profitability is maximized. Furthermore, they examine as to whether or not deviations from the optimal working capital level reduce firm profitability indicate that deviations above or below the optimum decrease profitability.
Ozgulbas et al. (2006) states the effects of firm size on performance over the firms operating in Istanbul Stock Exchange between the years of 2000 to 2005. As a result of study, they have found that big scale firms have a higher performance as compared to small scale firms. Jonson in 2007 also find out that big scale firms have higher profitability as compared to small.
J. Aloy Niresh & T. Velnampy (2014) explored the effect of firm size on profitability of quoted manufacturing firms in Sri Lanka. In this study, data of 15 companies which were active in Colombo Stock Exchange (CSE) between the years 2008 to 2012 has been used. As indicators of firm profitability, Return on Assets and Net Profit have been used whereas Total Assets and Total Sales have been utilized as indicators of firm size. Correlation and regression methods have been used in the empirical analysis. There is no indicative relationship between firm size and profitability of listed manufacturing firms, the findings reveal. In addition, the results showed that firm size has no profound impact on profitability of the listed manufacturing firms in Sri Lanka.
One of the previous research studies have done on working capital management and firm’s profitability. Berg, H (2016) stated that working capital management (WCM) will most likely be one management tool for improving business for small and medium-sized enterprises (SMEs). His study based on Norwegian SMEs, efficient WCM will generate more profitability. The sample comprised 21,075 SMEs, covering the period 2010–2013, and the SMEs were selected after employing a range of filters. Panel data treatment with fixed effect regression was considered the most appropriate approach for describing and analyzing our sample. This study finds a negative relationship between profitability and the number of days of inventory, the current asset ratio (ACR), number of days accounts payables (ACP) and cash conversion cycle (CCC) variables. For Norwegian firms and practitioners the results were supporting their current use of an aggressive WCM-strategy, as it contributes to profitability.
M. Monica, (2017) find in his study that return on asset (ROA) in a sample of Pakistani firm have only positive correlated with sales growth and with the remaining all the independent variables have negatively correlated. He also find that firms have lower average collection period (ACP) and higher average payments period (APP) a better return on asset (ROA). Firm size have negative correlation with return on asset in Pakistani firms also show that smaller firms have a greater return on assets as compare to lager firms. But this is not true for the firms in Thailand and Bangladesh which have a positive correlation with the dependent variable in his research model. Thailand and Bangladesh firms also exhibit a negative correlation between the ROA and cash conversion cycle.
From past literatures it is clear that the studies on the effects on profitability have generated varied results ranging from those supporting a +ve (direct) relationship among the variables used in the study to those opposing it. There is no common agreement on how the firm size is related to firm profitability and also in other variables as well. Hence, the results are inconclusive and require more empirical work.
Conceptual Framework
There are a lot of factors that affect profitability but this study will be limited to some factors such as firm size, financial leverage, asset turnover, financial debt ratio and sales growth. This study will be show these variables impact on profitability.
Here the dependent variable is profitability which shows the success of the business and a business that is not profitable cannot survive. The proxy will be used for profitability that is Return on Assets (RoA) Earnings before Interest & Tax (EBIT) divided by Total Assets & multiplied by 100.
The independent variables are firm Size (logarithm of total assets or sales), it is the amount and variety of production capacity and ability a firm possesses or the amount and variety of services a firm can provide concurrently to its customers, Financial leverage (Total liabilities divided by Shareholder equity), it refers to the use of debt to acquire additional assets, Asset turnover (Sales divided by Assets), this is a financial ratio that measures the efficiency of company’s use of its assets in generating sales revenue or sale income to the company, Financial debt ratio (Short term loan plus long term loan divided by Total Assets), it is also referred to as the debt to asset ratio it can be interpreted as the portion of a company’s assets that are financed by debt and Sales growth (Sales growth represents growth in sales for firms with reference to sales in preceding financial year,(〖(Sales〗_(1 )- 〖Sales〗_0))⁄〖Sales〗_0 .
Research Methodology
Sample and Population
There are seven listed fertilizer firms in Karachi Stock Exchange. Population for this study is all registered fertilizer firms listed in a Karachi Stock Exchange (KSE). Time frame will be five year from 2011 to 2015.
Propose data collection procedures
For this study data will be collected from the annual reports of the listed fertilizer firms in Pakistan. That is available on the websites of these fertilizers firms and also in the Karachi Stock exchange annual reports of listed firms. Data will be collect of only five years from 2011 to 2015. Secondary data we will use in this study.
Type of study
This will be a quantitative research study. Quantitative research approach will be used for conducting this research study. The results will be based on some statistical results.
Unit of analysis
In this research study the unit of analysis is the listed fertilizer firms in Pakistan.
Propose data analysis technique
For this research study analysis we will use regression and correlation methods to answers the questions. The results of this study will be in numeric form and on basis of our results we will suggest some recommendations. Software we will use for data analysis is SPSS.
Following Regression Model will be used based on the variables in this study.
〖RoA〗_(i,t )=β_0+β_1 〖LTS〗_(i,t)+ β_2 〖FL〗_(i,t)+ β_3 〖AT〗_(i,t)+ β_4 〖FDR〗_(i,t)+ β_5 〖SGROW〗_(i,t)+ ε
Where:
RoA = Return on Assets
FL= Financial Leverage
AT = Asset Turnover
FDR= Financial Debt Ratio
SGROW= Sales Growth
βo = Constant
And ε = Error Term.

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