a study on determinants of shareholders’ return with special reference to bse 500 companies

7/23/2019 A study on determinants of Shareholders’ Return with special reference to BSE 500 companies

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PROJECT REPORT

“A study on determinants of Shareholders’ Return with

special reference to BSE 500 companies”

By

Rachana Sharma

Enrolment No- 121826974

Course - MS-100

Under the Guidance of

Prof. Hussain Ahmed

Post Graduate Diploma in Finance& Control

(St Xavier’s College, Ranchi)

INDIRA GANDHI NATIONAL OPEN UNIVERSITY

NEW DELHI



TABLE OF CONTENTS

CHAPTER CONTENTS PAGE NO.

Chapter - 1 Introduction to the study Definition and importance of Shareholders 2- 4

Computation of Shareholders’ Return 4-5

Det erminants of Shareholders’ Ret urn 5-6

Rationale of the topic chosen for the study 7

Chapter - 2 Research Methodology

Statement of the research problem 9

Objectives of the study 9-10

Scope of the study 10-11

Research Design 11

Nature and Source of data collected 11 Sample & Sampling Techniques 11-12

Data Handling Tools & Techniques 12-13

Limitations of the study 13

Chapter - 3 Relationship between Accounting Performance

Variables and Shareholders’ Return

Theoretical Background 15-26

Literature Review 17-26

Research Gap 27

Chapter - 4 Data Analysis & Discussion

Descriptive Statistics 29-36 Trend Analysis 37-43

Correlation 44-48

Regression Analysis 49-56

Chapter - 5 Findings and Inferences

Major Findings 58-62

Chapter - 6 Conclusion and Direction for Further Research

Conclusion 64

Direction for Further Research 64-65

Bibliography 65-69



List of Tables

Table 4.1. Descriptive Statistics of Shareholders’ Return…………………………………………….…….30

Table 4.2. Descriptive Statistics of Overall Financial Performance Ratio……………………………31

Table 4.3. Descriptive Statistics of Profitability Ratio……………………………………………….……….32

Table 4.4. Descriptive Statistics of Investment Utilization Ratio……………………………….……….33

Table 4.5. Descriptive Statistics of Dividend Ratio…………………………………………………….……….34

Table 4.6. Descriptive Statistics of Financial Condition Ratio………………………………………..…..35

Table 4.7. Descriptive Statistics of Working Capital Ratio………………………………………………….36

Table 4.8. Trend Analysis of Shareholders’ Return……………………………………………………..…….37

Table 4.9. Trend Analysis of Overall Performance Measures……………………………………..…….38

Table 4.10. Trend Analysis of Profitability Ratio………………………………………………………..……..39

Table 4.11. Trend Analysis of Investment Utilization Ratio……………………………………………….40

Table 4.12. Trend Analysis of Dividend Ratio……………………………………………………………..…….41

Table 4.13. Trend Analysis of Financial Condition Ratio…………………………………………..……….41

Table 4.14. Trend Analysis of Working Capital Ratio…………………………………………………..……..43

Table 4.15. Correlation between Shareholders’ Return and Overall Performance Ratio….…44

Table 4.16. Correlation between Shareholders’ Return and Profitability Ratio…………………..45

Table 4.17. Correlation between Shareholders’ Return and Investment Utilization Ratio…..46

Table 4.18. Correlation between Shareholders’ Return and Dividend Ratio………………………..46

Table 4.19. Correlation between Shareholders’ Return and Financial Condition Ratio………..47

Table 4.20. Correlation between Shareholders’ Return and Working Capital Ratio……………..48

Table 4.21. Regression between Shareholders’ return and Overall Performance Ratio……….50

Table 4.22. Regression between Shareholders’ return and Profitability Ratio……………..………51

Table 4.23. Regression between Shareholders’ return and Investment Utilization Ratio……..52

Table 4.24. Regression between Shareholders’ return and Dividend Ratio……………..……………53

Table 4.25. Regression between Shareholders’ return and Financial Condition Ratio…………..54

Table 4.26. Regression between Shareholders’ return and Working Capital Ratio………………..55



Table 4.27. Regression Analysis – Excluded Variable…………………………………………………………55-56

List of Charts

Chart 1.1: Determinants of Shareholders Return…………………………………………………………….…….11

Chart 4.1: Descriptive Statistics of Shareholders’ Return……………………………………………………….30

Chart 4.2: Descriptive Statistics of matrix of overall financial performance……………………………31

Chart 4.3: Descriptive Statistics of indicators of Profitability Ratio…………………………………………32

Chart 4.4: Descriptive Statistics of indicators of Investment Utilization Ratio…………………………33

Chart 4.5: Descriptive Statistics of indicators of Dividend Ratio………………………………………………34

Chart 4.6: Descriptive Statistics of indicators of Financial Condition Ratio………………………………35

Chart 4.7: Descriptive Statistics of Working Capital Ratio…………………………………………………..…..36

Chart 4.8: Trend Analysis of Shareholders’ Return……………………………………………………………..…..37

Chart 4.9: Trend Analysis of indicators of overall financial performance…………………………………38

Chart 4.10: Trend Analysis of indicators of Profitability Ratio………………………………………………...40

Chart 4.11: Trend Analysis of indicators of Investment Utilization Ratio…………………………….…..40

Chart 4.12: Trend Analysis of indicators of Dividend Ratio……………………………………………….……..41

Chart 4.13: Trend Analysis of indicators of Financial Condition Ratio……………………………..……….42

Chart 4.14: Trend Analysis of indicators of Working Capital Ratio……………………………………………43

Chart 4.15: Correlation between Shareholders’ Return and Overall Performance Ratio………….44

Chart 4.16: Correlation between Shareholders’ Return and Profitability Ratio ……………………….45

Chart 4.17: Correlation between Shareholders’ Return and Investment Utilization Ratio………..46

Chart 4.18: Correlation between Shareholders’ Return and Dividend Ratio…………………………….47

Chart 4.19: Correlation between Shareholders’ Return and Financial Condition Ratio…………….47

Chart 4.20: Correlation between Shareholders’ Return and Working Capital Ratio ………………..48

Chart 4.21: Regression between Shareholders’ Return and Overall Performance Ratio............50

Chart 4.22: Regression between Shareholders’ Return and Profitability Ratio………………………..51

Chart 4.23: Regression between Shareholders’ Return and Investment Utilization Ratio………..52

Chart 4.24: Regression between Shareholders’ Return and Dividend Ratio….…………………………53

Chart 4.25: Regression between Shareholders’ Return and Financial Condition Ratio……………..55

Chart 4.26: Regression between Shareholders’ Return and Working Capital Ratio………..………..56



Chapter 1: Introduction to the Study



1. Introduction to the Study

This chapter presents the discussion on

- Definition and Importance of Shareholders

-

Roles of shareholders- Shareholders value

- Computation of Shareholders’ return

- Determinants of Shareholders’ return

- Rationale of the topic chosen for the study

DEFINITION AND IMPORTANCE OF SHAREHOLDERS

Shareholders are the owners of companies. A small business concern may have just oneshareholder [i.e owner], the founder, while a public limited company may have thousands

of individual shareholders and institutional shareholders such as mutual fund companies,

insurance companies, pension funds and hedge funds. A shareholder is an individual or an

organization or a company that legally own share(s) of stock in a joint-stock company. By

owning shares of stock, a company’s shareholders collectively own the company and

therefore have the right to cast their votes in meetings conducted to take decisions that

affect how the company is run. This usually means that the shareholders as owners will

push the company’s actions that increase their own financial returns. Shareholders play

an important role in the financing, operations, governance and management of a business

entity.

Financing

One of the primary reasons for a company going public is to raise funds from more number

of investors. In return, the company's founders/promoters give up part of their ownership

to these new investors.

Operations

Shareholders play both direct and indirect roles in a company's operations. They elect the

board of directors who appoint and supervise senior officers, including the chief executive



officer and the chief financial officer. They play an indirect role through trading in the

shares of the company in the stock market.

Governance

Public companies usually have formal corporate governance policies, such as defining the

composition and roles of different board committees, the role of the chairman, codes of

conduct and business ethics. Boards of directors answer to shareholders, not to

management while the management is reporting to the board of directors elected by the

shareholders.

Management

Shareholders usually control a public company through their power to hire and fire the

managers of the firm. In other words the mangers act as the agents of the shareholders in

the pursuit of maximizing the wealth of the shareholders.

Hence the literature on finance states that the objective of a business entity is to maximize

the wealth of its shareholders.

SHAREHOLDERS’ Value

Due to the direct and indirect influence exercised by the shareholders and because of the

company’s dependence on shareholders, many companies aim to accomplish the

shareholder wealth maximization objective and work towards increasing shareholder

value on a consistent basis. Shareholder value refers to a company's value less its debt to

outsiders. Shareholder value can refer to any one of the following

[a] Book Value or Net Worth or Shareholders’ Funds or owners’ Equity : Itis computed by subtracting the accounting value of liabilities from the total amount of

liabilities and shareholder funds. Alternatively, Book value is the sum of Paid in Capital

and Reserves and Surplus [or Retained Earnings] of the company. This is an accounting

value and hence may not reflect the market value of the shareholders’ funds.



[b] Market Capitalization or Market Value of Equity : This is computed by

multiplying the number of outstanding equity shares of a company with its current market

price per share on the date of computation. This is a relatively better measure of the value

of shareholders as it reflects the current market value of the company to its equity

shareholders.

COMPUTATION OF SHAREHOLDERS RETURN

Companies create value for their shareholders when their investment returns are more

than that of the investment costs. Shareholders normally expect a minimum return on

their investments that is equal to the going return on a risk free investment

(e.g., Treasury securities such a 10 year Government Bond) plus a risk premium for

investing in equity shares which is determined by the level of risk associated with a

particular company. According to Aswath Damodaran, the Risk of a company is

determined by its decisions on

[a] Businesses it is doing : Companies that are into sectors that are characterized by lower

variations in profits such as Fast Moving Consumer Goods[FMCG] are perceived to be

having lower risk compared to companies that are operating in sectors that are dealing

with by discretionary products or luxurious products and services such as luxurious hotels.

[b] Operating Leverage: It refers to the proportion of fixed cost to the total cost of a

company. For instance if a company’s Fixed Cost to Total Cost ratio is 80% , it means that

if the business is not doing well it will incur a huge loss compared to another company

which has a Fixed cost to Total Cost ratio of 20%.

[c] Financial Leverage: It indicates the company’s financial structure i.e reflects how the

company funds its investment in assets. Companies have two sources of funds namely

Debt and Equity. This ratio is otherwise known as Debt to Equity ratio. Higher the D/E

ratio, higher is the risk of the company.

The Literature in Finance states that companies deliver returns to their shareholders in

the form of dividends and share price appreciation. If a company is perceived as not

increasing shareholder wealth over time, investors may lose confidence and either decide

http://www.referenceforbusiness.com/knowledge/United_States_Department_of_the_Treasury.html

http://www.referenceforbusiness.com/knowledge/United_States_Department_of_the_Treasury.html



to sell its shares or give pressures to the company to take steps to improve its

performance, such as by replacing the CEO or altering the corporate strategy.

Total Shareholder Returns is the sum of increase in share price between the date of buying

the share and the date of selling it [or the date of return computation in case of continuous

holding of the share by the investors; in that case it is not the actual return but the notional

return and the amount of dividend paid to the shareholders by the company. The

shareholder returns is computed using the following formula

Where

TSR = Total Shareholder Return in the investment period/horizon

= share price at beginning of the year/Investment Period,

= share price at end of year/Investment Period,

Dividends = dividends paid over the year/Investment Period

The amount of dividend paid by the company is very small and hence the researchers

consider only the appreciation in the share price of a stock for the computation of

shareholders’ return.

DETERMINANTS OF SHAREHOLDERS’ RETURN

This study aims to measure the impact if any of the Accounting Performance Measures on

the Shareholders’ Return of the BSE 500 firms [Firms in the Bombay Stock Exchange 500

Index, one of the indices of Bombay Stock Exchange in India]. The following diagram

depicts the research model.



Chart 1.1: Determinants of Shareholders Return

RATIONALE OF THE TOPIC CHOSEN FOR THE STUDY

Overall Accounting Performance

Measures

ROIC (Return on Invested Capital)

ROE (Return on Equity)

ROA(Return on Asset)

Profitability Ratios

GPM (Gross Profit Margin)

EBITDA Margin (Earnings BeforeInterest, Taxes, Depreciation and

Amortization]

EBIT Margin (Earnings Before

Interest &Taxes)

PBT Margin (Profit before Tax)

PAT Mar in Profit after Tax

Investment Utilization Measures

Asset TurnoverInvested Capital Turnover

E uit Turnover

Working Capital Ratio

CCC (Cash Conversion

Financial Condition Ratios

CR (Current Ratio)

QR (Quick Ratio)

D/E Ratio (Debt Equity Ratio)

Interest Cover Ratio

DETERMINANTS

OF

SHAREHOLDERS’

RETURN

Dividend Ratio

Dividend Payout Ratio



What determines the return for the equity shareholders is a question that needs to be

answered by every public limited company as the objective of the business revolves

around maximization of the wealth of the shareholders. Financial Statements

communicate the operating, financial condition and cash management abilities of a

firm to its current and potential investors. It is rational for any investor to invest his

funds in a firm that performs well on fundamentals. Hence if a firm’s financial

performance is good, then it should get reflected in terms of an appreciation in its

share price. Therefore, this study aims to examine whether the financial performance

measured in terms of accounting measures such as Overall Performance Ratios,

Profitability Ratios, Investment Utilization Ratios, Working Capital Ratios, Financial

Condition Ratios& Dividend Ratios impact the shareholders’ return of the sample

companies.

Structure of the Report

This Chapter has presented the introduction to the study and the report presents the

remaining research work in the following chapters

Chapter 2 discusses the research methods adopted by the researcher

Chapter 3 presents the relationship between the accounting performance measures

and shareholders’ returns

Chapter 4 discusses on the results of the data analysis and hypothesis testing

Chapter 5 provides the major findings and inferences made by the researcher from the

analysis of the data and

Chapter 6 concludes on the research work besides spelling out the directions for

further research.



Chapter 2: Research Methodology

2. Research Methodology



This chapter presents the discussion on

- Statement of the Research Problem

- Objectives of the study

- Scope of the study

-

Research design

- Nature of Data Collected for the study

- Sample and Sampling Techniques

- Data analysis tools and techniques and

- Limitations of the study

STATEMENT OF THE RESEARCH PROBLEM

This research work aims to address the following research problem.

Whether accounting variables such as Overall Performance measures, Profitability

Ratios, Investment Utilization measures, Working Capital Ratios, Financial Condition

Ratios and Dividend Ratios affect the shareholders’ return of sample BSE 500

companies?

OBJECTIVES OF THE STUDY

Primary Objective: The primary objective of the research work is to study the

impact of accounting performance variables on Shareholders’ return of the Sample

Companies.

Secondary Objectives

The following are the secondary objectives of the research work:

To find the accounting performance variables (Overall Performance measures,

Profitability Ratios, Investment Utilization ratios, Working Capital Ratios, Financial

Condition Ratios & Dividend Ratios ) that impact the Shareholders’ Return of the

sample firms



To quantify the impact of the overall financial measures such as the ROIC (Return

on Invested Capital) and ROE (Return on Equity) on Shareholders’ Return of the

sample firms

To measure the impact of the profitability measures such as the Gross Profit

Margin, EBITDA Margin(Earnings Before Interest, Taxes, Depreciation and

Amortization) ,EBIT Margin (Earnings Before Interest & Taxes) EBT Margin

(Earnings Before Tax) and PAT Margin (Profit After Tax) on the Shareholders’

Return of the sample companies

To study the impact of the investment utilization measures such as the Asset Turn,

IC Turn, Equity Turn and Fixed Asset Turn on the Shareholders’ Return of the

sample firms

To find whether the working capital ratios impact the Shareholders’ Return of the

sample companies

To study the impact of the financial condition ratios on the Shareholders Return

To measure the impact of the dividend ratios on the Shareholders’ Return

SCOPE OF THE STUDY

It is a known fact that the Shareholders are the major players in running the public

Companies. They become the owners of companies by making their investments in the

companies and get the right to take decisions which impact the company’s

profitability. The ultimate objective of the public companies is to maximize the

shareholders’ return as it is their investments which cater to the requirement of long

term capital of the firm which is very much essential for the growth of the firm.

The study aims to reveal how the different accounting performance variables are

related with the Shareholders’ return and how these accounting variables impact the

shareholders’ returns of the sample firms. The study is restricted to the firms that form

part of the BSE 500 index. The firms in the BSE 500 index excluding Banking, Finance &

IT sectors companies are considered for the study. The study is based on the data



collected from the ACEEQUITY database for the variables considered by the researcher

for the sample companies for the latest five financial years [From Financial Year ending

on 31st March 2010 to Financial Year ending on 31st March 2014].

RESEARCH DESIGN

The Study is dealing with financial research and hence has adopted the analytical

research design. The study describes the data available for the sample companies from

the ACEEQUITY database.

NATURE & SOURCE OF DATA COLLECTED

ACE Equity is used for deriving companies’ specific financial data. The database is used

to collect the secondary data on the dependent and independent variables for the

study.

SAMPLE & SAMPLING TECHNIQUES

Companies forming part of BSE 500 index are the primary sample of the study.The

required data were collected from listed firms in the Bombay Stock Exchange (BSE).

The reason for choosing BSE is primarily owing to the greater transparency and volume

of trading than that of other National and Regional Stock Exchanges.

Companies operating in Banking, Finance & IT sectors have been removed from the

sample list. This is due to the fact that some of their accounting performance measures

such as cash conversion cycle; investment utilization measures may not be significant

enough to generalize the findings of the study. For instance CCC (Cash ConversionCycle) is a meaningless number for an IT company as it will have zero days of inventory

and insignificant days of payable numbers. Similarly banking companies cannot be

studied on working capital measures such as CCC.



Further firms operating in the above stated industries do not get affected by cash

conversion cycle as working capital is a very insignificant number for these firms.

Hence the original number of the sample firms is brought down from 500 to 293 firms.

The researcher has also filtered out another 33 firms from the sample as the Ace Equity

database [from which the researcher has collected the data on the variables used by

her to establish the relationship between the accounting variables and shareholder

value] does not report the complete data set for these 33 firms. Hence the study is

based on the shareholder returns and accounting variables of 260 firms that form part

of the BSE 500 Index. The required variables were collected for the 260 firms from the

ACE Equity Database for the five financial years (2010-2014). Data for 2015 has not

been reflected in the work as Ace Equity does not report complete data for the FY

2015.

DATA HANDLING TOOLS & TECHNIQUES

Descriptive Statistics, Trend analysis, Correlation and Regression Analysis are carried

over to accomplish the objective of the study. SPSS was used to arrive at the results of

data analysis.

Hypothesis Testing

In order to analyze the results, the researcher has formulated a number of hypotheses

and tested the same on the relationship between the dependent and the independent

variables.

Definition of Variables

The researcher has used the shareholders’ return as the dependent variable. The

following variables are used as the independent variables in this study

Overall Performance measures: ROIC, ROE & ROA

Profitability Measures: GPM, EBITDA Margin, BIT Margin, PBT Margin & PAT Margin

Investment Utilization Measure: Asset Turnover

Working Capital Measure: Cash Conversion Cycle



Financial Condition [Liquidity & solvency] Measures: Current Ratio, Quick Ratio, Debt

to Equity ratio & Interest Cover ratio.

Dividend Ratio: Dividend Payout Ratio

LIMITATIONS of the study

The following are the limitations of the study:

-The findings of the study may not be generalized as the study is based on the last five

years period. This is due to the fact that shareholders’ returns do get affected by the

economic cycles and stock market sentiments.

-The results and findings might be different if the sample companies are taken from

other indices such as BSE 100, BSE Sensex, NIFTY 50 and so on.

-Besides, Analysis part does not contain information in regard to some accounting

variables such as Gross Profit margin, Invested Capital Turnover and Equity Turnover

as Ace Equity Turnover does not report the complete set of data for the said variables.



Chapter 3: Relationship between Accounting Variables and

Shareholders’ Return



3. RELATIONSHIP BETWEEN ACCOUNTING

VARIABLES AND SHAREHOLDERS’ RETURN

This chapter presents the literature discussion on

-

Shareholders’ return

- Working capital ratio

- Dividend ratios

- Investment utilization ratios

- Overall financial performance measures

- Profitability ratios

- Financial Condition ratios

- Research Gap

SHAREHOLDERS’ RETURN (THEORETICAL BACKGROUND)

Introduction: Every business should set itself a business objective. Business magazines,

newspapers, and journals are replete with articles exhorting managers to adopt the

creation of shareholder value as their prime objective because it is the Shareholders

who enable the business firms to obtain the required amount of their long term

capital. It is generally agreed in theory that the financial goal of the firm should be

shareholders’ wealth maximization (SWM), as reflected in the market value of the

firm’s shares.

Literature Review : According to I M Pandey (2005),SHAREHOLDERS’ WEALTH

MAXIMIZATION (SWM) means maximizing the net present value of a course of action

to shareholders. Net Present Value (NPV) or wealth of a course of action is the

difference between the present value of its benefits and the present value of its costs.

A financial action that has a positive NPV creates wealth for shareholders and

therefore, is desirable. A financial action resulting in negative NPV should be rejected

since it would destroy shareholders’ wealth.

The objective of SWM is an appropriate and operationally feasible criterion to

choose among the alternative financial actions. It provides an unambiguous



measure of what financial management should seek to maximize in making

investment and financing decisions on behalf of shareholders.

Many scholars and managers endorse the idea that the primary purpose of the firm

is to make money for its owners. This shareholder wealth maximization objectiveis justified on the grounds that it maximizes social welfare.

Researcher (Dobson, John; 1999) has found out that for those educated in modern

business schools, the justification for decisions made by financial professionals in

business organizations has been supplied by financial economic theory. Broadly, the

theory posits that the ultimate objective of a business organization is to maximize its

market value. This objective is, in turn, justified by the premise that such activity

undertaken competitively, within the law, by individual firms will lead to maximal

social welfare.

By the mid-1990s shareholder value-related management approaches found a

prominent, not to say predominant, position among management and accounting

scholars and in practice. Core elements of these management approaches are

management accounting techniques that are intended to direct managerial decision-

making to maximize a firm’s value. Having said that, the ideas that the only social

responsibility of firms is to create profits—as proposed by Friedman (1962: 133) — and

that maximizing firm value for the owner is the only relevant objective of a firm

Working Capital Ratios (THEORETICAL BACKGROUND)

Introduction: Firms’ profitability is mainly determined by two main determinants

namely capital structure and working capital management as widely discussed by

academia (Lazaridis and Tryfonidis, 2006). In the literature on finance, working capital

management has been approached in numerous ways. Some researchers (Besely et al.

1987) have studied the impact of optimum inventory management while other

authors have studied the management of accounts receivables in an optimum way



that leads to profit maximization. According to Deloof (2003) the way in which working

capital is managed has a significant impact on profitability of firms and thereby

impacting the value of the shareholders. This result indicates that there is a certain

level of working capital requirement which potentially enhances shareholders’ value.

Relevance of Cash Conversion Cycle: W orking capital management can be best

described by the cash conversion cycle and there seems to be the existence of a

relationship between profitability and management of the cash conversion cycle. In

order to have maximum shareholder value, an equilibrium should be maintained in

receivables-payables and inventory. This simple equation encompasses all three very

important aspects of working capital management. It is an indication of how long a

firm takes to receive back the cash which are invested in its operating activities or it

indicates the time gap between purchase of goods and collection of sales proceeds

from the customers.

From the corporate finance and financial economics literature, it is observed that there

is a strong relationship between the cash conversion cycle of a firm and its profitability.

There are three components of Cash Conversion Cycle (CCC) namely accounts

payables, accounts receivables and inventory. CCC can be managed in multiple ways

in order to enhance the shareholders’ value.

Literature Review: Working capital is an important and integral part of any business,

irrespective of the nature, for running the day to day operations in a smooth manner.

But the research on this interesting area is really scanty.

Sagan (1955) was arguably the first conceptual paper on the theory of working capital

management, in which he emphasized the need for management of working capital

and warned that it could vitally affect the financial health of the company if not

properly managed and concluded that improper management of working capital of

firms will lead to its bankruptcy.



Many researchers (Wang, 2002; Deloof, 2003) have established a relationship

between working capital management and profitability. Wang (2002) found a negative

relationship between return on investment and cash conversion cycle of firms

operating in Japan and Taiwan. Deloof (2003), with the sample of 1,009 Belgian firms,

found significant negative relation between the gross operating income and accounts

receivable and inventory. He concluded that negative relation between cycle time of

accounts payable and firms’ profitability which is not in agreement with the argument

of shorter cash conversion cycle of Jose et al. (1996)

Contrary to the above studies, Mathuva (2009) found a positive relation between

profitability and number of day’s inventory, which is inconsistent with the findings of

Deloof (2003), García-Teruel and Solano (2007) and Falope and Ajilore (2009).

Mathuva (2009) argued that high inventory level reduces the cost of possible

interruption in the production and loss of business due to scarcity of product.

Dividend Ratio (THEORETICAL BACKGROUND)

Introduction: Dividend policy is concerned with financial policies regarding paying cash

dividend in the present or paying an increased dividend at a later stage. Whether to

issue dividends, and what amount, is determined mainly on the basis of the company's

inappropriate profit (excess cash) and influenced by the company's long-term earning

power. When cash surplus exists and is not needed by the firm, then management is

expected to pay out some or all of those surplus earnings in the form of cash dividends

or to repurchase the company's stock through a share buyback program.

Management must also choose the form of the dividend distribution, generally as

cash dividends or via a share buyback. Various factors may be taken into consideration:

where shareholders must pay tax on dividends, firms may elect to retain earnings or

opt for stock buyback, in both cases increasing the value of shares outstanding.

Alternatively, some companies will pay "dividends" in the form of stock rather than

cash dividend. Financial theory suggests that the dividend policy should be set based

http://en.wikipedia.org/wiki/Dividend



http://en.wikipedia.org/wiki/Treasury_stock



http://en.wikipedia.org/wiki/Dividend_tax












upon the type of company and what management determines is the best use of the

liquid resources for the firm to its shareholders. As a general rule, shareholders of

growth companies would prefer managers to have a share buyback program, whereas

shareholders of value or secondary stocks would prefer the management of these

companies to payout surplus earnings in the form of cash dividends.

By dividend policy we mean that the amount of earnings distributed to the

shareholders and the amount of retained earnings. So in this policy the amount of

earnings of the firm are divided into two parts, dividend paid and the amount kept for

future projects. Dividend policy is considered an important tool for investors to assess

the company's financial position as they require return on their investment and

dividend paying company will certainly attract them.

In the world of corporate finance the question that whether the earnings of the firm

should be distributed to shareholders or it must be reinvested in future profitable

projects has great importance. To answer this question finance mangers must consider

which dividend policy will increase the shareholders wealth. Shareholders like the cash

dividends but on the other hand they also want the growth of the company by

reinvesting the funds.

In the dynamic business situations, finance manager's prime objective is to maximize

the shareholder’s wealth as they are principle agents of them. Shareholders wealth is

represented in the market price of the share which is the result of company's efficiency

in its financing, investment and dividend policy decisions. The optimal dividend policy

is that which increases the share prices of the company which in return increase the

shareholder's wealth.

Literature Review: Researchers had tried to explain the reasons for firms to pay

dividends (Green 1983). Miller and Modigliani (1961) argued that the dividend policy

has no effect on the shareholder’s wealth. Dividend irrelevancy is also supported by

the work of (Scholes, 1974). Many researches had shown that there is dependency of



dividend policy on the shareholders wealth. Linter (1956), Gordon (1963) and

Richardson (1986) had stated that there is a relationship between the dividend policy

and the firm's value and the dividend policy has the positive relationship with the

firm's value. Researchers also found the positive impact of dividend policy on

shareholders wealth. (Fama, 1969; Petit, 1972 &Travlos, 2001).

Besides, Ansar Irtaza, Butt Arslan Ali, Shah Syed, Basit Hussain (2015) have examined

in their study that there is a strong relationship between shareholders wealth and

dividend policy. They have taken sample of 30 companies from Karachi stock exchange

which includes companies from textile, cement and chemical sector.Shareholders

wealth is measured with the market price of shares. Dividend per share, retained

earnings, lagged price and return on equity was used as independent variables in their

study. The estimation based on multiple regression model shows that there is strong

relationship between shareholders wealth and dividend policy.

Researchers (Thanh Truong, Richard Heaney; 2007) find that that firms are more likely

to pay dividends when profitability is high, debt is low, investment opportunities are

limited or when the largest shareholder is not an insider. Further, the magnitude of

dividend payout tends to be smaller when the largest shareholder is either an insider

or a financial institution. It is also apparent that largest shareholding and dividend

payout are related and that, consistent with the extant literature, legal system does

matter in dividend policy decisions.

Investment Utilization Ratio (THEORETICAL BACKGROUND)

A company’s investment turnover ratio measures its ability to generate sales revenue

using the money it has invested in the company. The ratio equals sales divided by the

sum of long-term liabilities plus stockholders’ equity. Stockholders’ equity is the

amount of money stockholders have invested in a company. The amount of long-term

liabilities is the amount of money debt holders have invested in the company. We can

calculate investment turnover ratio using information from a company’s annual



report. A higher ratio means a company is using its invested money more efficiently,

which increases value for stockholders. Investment turnover is called, more

specifically, asset turnover, invested capital turnover, or equity turnover, depending

on which definition of investment is being used. Assets are used to generate sales.

Therefore, a firm should manage its assets efficiently to maximize sales. The

relationship between sales and assets is called assets turnover. The Asset Turnover

ratio is an indicator of the efficiency with which a company is deploying its assets.

Generally speaking, the higher the ratio, the better it is, since it implies the company

is generating more revenues per dollar of assets. But since this ratio varies widely from

one industry to the next, comparisons are only meaningful when they are made for

different companies in the same sector.

Literature Review : Lаmbеrson (1995) showed that asset management of the firm is

the most critical issue in the firm where there are many managers who are managing

the financial conditions in order to identify the reasons of good asset management

and the level of optimization of management of assets (Аfzа & Nаzir, 2009). By having

the balanced level of asset management , the major component is the skills and the

ability of the management of the firm who make key decisions in order to manage the

key areas of receivables, inventory and other issues as well (Filbеck & Kruеgеr, 2005).

The amount of investment in current assets can be managed by decreasing the costs

of finance and by increasing the funds available to the firms. Lаmbеrson (1995)

explained that the effectiveness of the managers can be computed by the time they

make decisions and the efforts that are exerted on the identification of the problems.

The best level of asset management is by keeping balance in the efficiency and risk

involved. There can be various ways for optimization of different parts of asset

management (Аfzа&Nаzir, 2009). Shin &Soеnеn (1998) conducted a survey in which

the sample of firms totaled 5897, is used between the years of 1978-1988 to explore

the relation between the trade cycle to measure the effectiveness of asset

management and the profit ratio. Dеloof (2003) explored the relation between the



profit ratio and the asset management by collecting the sample of firms that are non-

financial total of 1000 Belgium based firms. The results of study showed the indirect

relation between the profit ratio and the asset management of all the firms based in

Belgium. The research showed that the profit rate can be decreased. The firms having

less profit took more time to pay. Singh &Pandey (2008) explained that the impacts of

the components of such asset management and the profit ratio are more relevant.

Overall Financial Performance Measures (THEORETICAL BACKGROUND)

Profitability ratios are an indicator for the firm's overall efficiency. It's usually used as

a measure for earnings generated by the company during a period of time based on

its level of sales, assets, capital employed, net worth and earnings per share.

Profitability ratios measures earning capacity of the firm, and it is considered as an

indicator for its growth, success and control. Creditors for example, are also interested

in profitability ratios since they indicate the company's capability to meet interest

obligations. Shareholders also are interested in profitability. It will indicate the

progress and the rate of return on their investments. The ratios of the return on assets

(ROA) and the return on owner's equity (ROE) are the most used profitability ratios in

the analysis. 1- Return on assets (ROA) ratio: Net profit after taxes/Total assets. This

ratio is calculated as net profit after tax divided by the total assets. ROA reflects how

much the firm has earned on the investment of all the financial resources committed

to the firm. 2- Return on owner's equity (ROE) ratio: Net profit after taxes/Total

shareholders’ equity. This ratio is calculated as net profit after tax divided by the total

shareholders’ equity. This ratio measures the shareholders rate of return on their

investment in the company. ROE reflects how much the firm has earned on the funds

invested by the shareholders (either directly or through retained earnings). This ROE

ratio is obviously of interest to present or prospective shareholders and is also of

concern to management because this measure is viewed as an important indicator of

shareholder value creation. This ratio is not generally of interest to division managers,



however, because they are primarily concerned with the efficient use of assets rather

than with the relative roles of creditors and shareholders in financing those assets.

Literature Review: (Abu Shanab, 2008) examined the impact of returns and risks on

the share prices for a sample of 38 industrial public companies in Jordan listed onAmman Security Exchange for the period of 2000 to 2007. The results of the study

showed that there is no effect for the returns, risks and dividends on the market value

per share. However, the results indicated that there is a significant relationship

between cash flow and share prices. (AL Kurdi, 2005) study explored the ability of the

published accounting Information to predict share prices for a representative sample

of 110 Jordanian public companies listed in Amman Security Exchange for the period

of 1994 to 2004. The results revealed that there is a relationship between the

published accounting Information of the insurance public companies and their share

price movements. The results also informed that market information have more ability

on predicting share prices compared to the accounting information. Another study by

AL Qudah[ 2004] tested the role of accounting exposure in indicating the real market

price. The sample was consisted of (35) public companies listed in Amman’s Stock

Exchange, and (23) licensed financial traders, and (27) investors at Amman’s Security

Exchange.

AL Khalayleh, (2001) tested the relationship between accounting performance

indicators and market performance indicators for a sample of (40) Jordanian public

companies listed in Amman Security Exchange during the period between the year of

1984 to 1996. The results showed a significant positive relationship between the

market price per share with the ratios of return on assets and return on equity.

Profitability Measures (THEORETICAL BACKGROUND)

Profitability ratios are the financial metrics that help investors in assessing a business's

ability to generate earnings compared with its expenses and other relevant costs

incurred during a specific period. When these ratios are higher than a competitor's



ratio or than the company's ratio from a previous period, this is a sign that the

company is doing well.

Earnings before Interest Taxes Depreciation and Amortization (EBITDA), is an often

used measure of a company's profitability. Financial analysts use EBITDA for a numberof purposes including calculating simple valuations of a firm, estimating cash flows,

and assessing debt servicing capability. The uses for EBITDA in financial analysis are

numerous, but in practice should be more restrained. While EBITDA has some useful

applications, it should be used with caution, as the problems with EBITDA are

abundant and can lead to a number of misguided conclusions.

EBIT measures the profit a company generates from its operations, making it

synonymous with "operating profit." By ignoring tax and interest expenses, it focuses

solely on a company's ability to generate earnings from operations, ignoring variables

such as the tax burden and capital structure. This focus makes EBIT an useful metric

for certain applications.

Profit before tax[PBT] measures a company's operating and non-operating profits

before taxes are considered. It is the same as earnings before taxes[EBT]. Profit before

tax provides investment analysts with useful information for evaluating a company’s

operating performance without regard to tax implications. By removing the tax factor,

profit before tax helps to minimize a variable that may be unique from company to

company, in order to focus the analysis on operating profitability as a singular measure

of performance. Such analysis is particularly important when comparing similar

companies across a single industry.

PBT measure combines all of the company's profits before tax, including operating,

non-operating, continuing operations and non-continuing operations. PBT exists

because tax expense is constantly changing and taking it out helps to give an investor

a good idea of changes in a company's profits or earnings from year to year.

http://www.investopedia.com/terms/c/continuingoperations.asp

http://www.investopedia.com/terms/t/tax-expense.asp

http://www.investopedia.com/terms/t/tax-expense.asp

http://www.investopedia.com/terms/c/continuingoperations.asp



Profit after Tax [PAT] is computed by dividing the amount of Net Income or PAT by the

amount of the sales revenue of the firm. This ratio is otherwise known as the Return

on Sales [ROS] ratio. This indicates the amount of net profit earned by a company out

of its every 100 rupee of sales revenue. The higher the profit margin, the better is the

financial performance of the firm. Many studies in the literature make use of these

profitability ratios while attempting to measure the financial performance of firms.

Financial Condition Measures (THEORETICAL BACKGROUND)

Solvency and liquidity are the measures that reflect an enterprise’s state of financial

health, but with some notable differences. Solvency refers to an enterprise's capacity

to meet its long-term financial commitments while l iquidity refers to an enterprise’s

ability to pay short-term obligations in time; the term also refers to its capability to sell

assets quickly to raise cash. A solvent company is one that owns more than it owes; in

other words, it has a positive net worth and a manageable debt load. On the other

hand, a company with adequate liquidity may have enough cash available to pay its

dues, but it may be heading for a financial disaster down the road.

Solvency and liquidity are equally important, and healthy companies are both solvent

and possess adequate liquidity. A number of financial ratios are used to measure a

company’s liquidity and solvency position; the most commonly used measures are

discussed below.

Liquidity Ratios

Current ratio = Current assets / Current liabilities

The current ratio measures a company’s ability to pay off its current liabilities

(payable within one year) with its current assets such as cash, accounts receivable

and inventories. The higher the ratio, the better is the company’s liquidity position.

Quick ratio = (Current assets – Inventories) / Current liabilities

http://www.investopedia.com/articles/basics/07/liquidity.asp






= (Cash and equivalents + Marketable securities + Accounts receivable) / Current

liabilities

The quick ratio measures a company’s ability to meet its short-term obligations

with its most liquid assets, and therefore excludes inventories from its currentassets. It is also known as the “acid-test ratio.”

Solvency Ratios

Debt to equity = Total debt / Total equity

This ratio indicates the degree of financial leverage being used by the business and

includes both short-term and long-term debt[ some of the researchers take only

long term interest bearing debt in the numerator while computing the debt to

equity ratio]. A rising debt-to-equity ratio implies higher interest expenses, and

beyond a certain point it may affect a company’s credit rating, making it more

expensive to raise more debt.

Interest coverage ratio = Operating income (or EBIT) / Interest expense

This ratio measures the company’s ability to meet the interest expense on its debt

with its operating income, which is equivalent to its earnings before interest and

taxes (EBIT). The higher the ratio, the better is the company’s ability to honor the

payment of its interest expense.

Literature Review : Some Researchers (Amos O. Arowoshegbe& Francis

KehindeEmen, 2014) have studied that as individual variable, the estimate of the

relationship between Debt Ratio (DR) and Return on Equity (ROE) shows a negative

relationship. This implies that an increase in debt ratio will bring about a decrease

in return on equity. The t-value of debt ratio is significant at 1% level. This implies

that debt ratio is capable of predicting return on equity and by implication

shareholders’ wealth.

http://www.investopedia.com/terms/d/dfl.asp

http://www.investopedia.com/terms/i/interestexpense.asp

http://www.investopedia.com/terms/o/operatingincome.asp

http://www.investopedia.com/terms/o/operatingincome.asp

http://www.investopedia.com/terms/i/interestexpense.asp

http://www.investopedia.com/terms/d/dfl.asp



RESEARCH GAP

It can be inferred from the above discussion that the earlier studies in the financial

literature have not made an attempt to find out the relationship between the

accounting performance variables such as the overall financial performancemeasures, profitability ratios, investment utilization measures, working capital

ratios, financial condition ratios and dividend ratios and the shareholders’ return of

the firms. Further one could hardly come across in the literature about the studies

that have identified the accounting variables that determine the shareholders’

returns of firms. Hence this research gap has persuaded the researcher to

undertake the present study.



Chapter 4: Data Analysis and Discussion



4. Analysis & Discussion

This section of the report deals with the data analysis and inferences made by the

researcher on the analysis of the data using statistical tools such as Descriptive

statistics, Trend Analysis , Correlation and Regression.

This is section is presented as below

[a] Descriptive Statistics of the Variables

[b] Trend Analysis

[c] Correlation

[d] Regression

[a] Descriptive Statistics

In order to get an overview about all the variables in this work, Descriptive Statistics

for five years’ average time has been reported in the table below.



Table 4.1

Descriptive Statistics of Shareholders’ Return

Variable Name Mean Median Standard

Deviation

Minimum Maximum

Shareholders Return

(%)

3.47 2.45 8.38 -24.04 35.20

From Table 4.1, we can infer that the average shareholders’ return of the sample

firms was at 3.47% which is slightly higher than the median for the variable at 2.45%.

The maximum for the variable is at 35.20% while the minimum is at -24.04%. The

standard deviation for the variable is at 8.38%.

4.1 Descriptive Statistics of Shareholders’ Return

3.47

2.458.38

-24.04

35.2

MEAN MEDIAN STANDARD

DEVIATION

MINIMUM MAXIMUM S h a r e h o l d e r s ' R e t u r n



Table 4.2

Descriptive Statistics of Overall Performance Ratios


Deviation

Minimum Maximum

ROIC (Return on

Invested Capital) (%)

18.18 15.90 22.42 -240.10 148.63

ROE (Return on Equity)

(%)

15.11 15.75 23.50 -174.922 116.988

ROA (Return on Asset)

(%)

7.61 6.33 7.11 -26.37 30.75

From Table 4.2, it can be inferred that the mean for ROIC, ROE and ROA is at 18.18%,

15.11% and 7.61% respectively and the standard deviation of the said variables is at

22.42%, 23.50% and 7.11%. The median for these variables is at 15.90%, 15.75% and

6.33%. ROIC is in the range between -240.10% and 148.63%. ROE is in the range

between -174.92% and 116.98%. And ROA is in the range between -26.37% and

30.75% for the sample firms.

4.2 Descriptive Statistics of matrix of overall financial performance

18.1815.9 22.42

-240.1

148.63

15.11 15.75 23.5

-174.922

116.988

7.61 6.337.11

-26.37

30.75


DEVIATION

MINIMUM MAXIMUM

ROIC (Return on Invested Capital) ROE (Return on Equity) ROA (Return on Asset)



Table 4.3

Descriptive Statistics of Profitability Ratios


Deviation

Minimum Maximum

EBITDA (Earnings before

Interest, Taxes,Depreciation &

Amortization) (%)

34.73 17.16 148.26 -143.878 2101.948

EBIT (Earnings before

Taxes) (%)

47.03 19.10 191.86 -852.116 1923.898

PBT (Profit before Tax) (%) 32.90 12.05 215.55 -101.45 2976.94

PAT (Profit after Tax) (%) 36.61 19.33 172.91 -1480 1263.576

From Table 4.3, we can infer that mean of sample firms’ EBITDA, EBIT, PBT and PAT

margins is at 34.73%, 47.03%, 32.90% and 36.61% respectively. Median of EBITDA,

EBIT, PBT and PAT is at 17.16%, 19.10%, 12.05% and 19.33%. Range of EBITDA is

between -143.87 to 2101.94. Range of EBIT is between -852.11 and 1923.89. Range of

PBT is between -101.45 and 2976.94. Range of PAT is between -1480 and 1263.57.

Standard deviation is the lowest for the EBITDA margin while it is the highest for the

PBT margin of the sample firms.

4.3 Descriptive Statistics of indicators of Profitability Ratio

34.7317.16

148.26

-143.878

2101.948

47.03

19.1

191.86

-852.116

1923.898

32.9

12.05

215.55

-101.45

2976.94

36.61 19.33172.91

-1480

1263.576


DEVIATION

MINIMUM MAXIMUM

EBITDA (Earnings before Interest, Taxes, Depreciation & Amortization)

EBIT (Earnings before Taxes)

PBT (Profit before Tax)

PAT (Profit after Tax)



Table 4.4

Descriptive Statistics of Investment Utilization Ratio


Deviation

Minimum Maximum

Asset Turnover

[Times]

0.97 0.80 .722 0 4.18

Table 4.4 highlights descriptive statistics of the collected variable of Asset Turn ratio.

It is observed that sample firms’ average turnover on asset is 1% with maximum of

4.18%. The sample firms have a standard deviation of 0.722%.

4.4 Descriptive Statistics of indicators of Investment Utilization Ratio

0.970.8 0.722

0

4.18


DEVIATION

MINIMUM MAXIMUM

A s s e t T

u r n o v e r



Table 4.5

Descriptive Statistics of Dividend Ratio


Deviation

Minimum Maximum

Dividend Payout

Ratio (%)

25.08 21.69 33.67 -36.38 400.02

From table 4.5 it is observed that an average of 25% dividend has been paid to the

shareholders with maximum of 400%. It can be seen that the median payout ratio of

the sample firm at 21.69% is close to the mean payout ratio. The standard deviation

for the sample firms is at 33.67% on this metric.

4.5 Descriptive Statistics of indicators of Dividend Ratio

25.0821.69

33.67

-36.38

400.02


DEVIATION

MINIMUM MAXIMUM



Table 4.6

Descriptive Statistics of Financial Condition Ratio


Deviation

Minimum Maximum

CR (Current

Ratio)[Times]

2.59 1.59 5.29 0.27 58.90

QR (Quick Ratio)

[Times]

1.95 1.10 4.68 0.24 58.90

D/E Ratio (Debt Equity

Ratio) [Times]

0.82 0.48 2.38 -4.80 33.63


[Times]

132.04 6.34 557.88 -548.62 4927.08

In table 4.6 data of financial condition ratios of the sample firms has been presented.

It is observed from the above table that firms have average current assets that are

about 2.59 times to pay the current liabilities with a maximum of 59 times and a

minimum of 0.27 times. The table reflects that the firms’ ability to meet their short-

term obligations with its most liquid assets at 2 times with a median quick ratio of 1.1

times with a maximum of 59 times and a minimum of 0.24 times. The sample firms

have an average debt-equity ratio of 0.82 times and the ratio ranges between -4.80

times and 33.63 times. It is interesting to see that firms’ average interest coverage

ratio is 132 times with a maximum observation of 4927 times and a minimum

observation of -549 times.

4.6 Descriptive Statistics of indicators of Financial Condition Ratio

2.59

1.59 5.29 0.27

58.9

1.95 1.1 4.68 0.24 58.9

0.820.48 2.38

-4.8

33.63

132.04 6.34

557.88

-548.62

4927.08


DEVIATION

MINIMUM MAXIMUM

CR (Current Ratio) QR (Quick Ratio) D/E Ratio (Debt Equity Ratio) Interest Cover Ratio



Table 4.7

Descriptive Statistics of Working Capital Ratios


Deviation

Minimum Maximum

Days’ Receivable 54.94 47.44 45.49 1.61 322.21

Days’ Inventory 77.77 46.15 148.54 0 1191.9Days’ Payable 80.25 52.85 292.05 7.62 4707.78

Cash Conversion

Cycle (Days)

52.46 42.45 330.76 -4634.20 1108.39

Table 4.7 gives the descriptive statistics of the variables of working capital ratios. It

could be observed from the above table that the average outstanding days with the

customers of the sample firms are about 55 days whereas the average due days to the

suppliers by the sample firms are 80 days. It is also inferred that the sample firms have

an average day’s inventory is around 78 days. The five year average cash conversion

cycle of the sample firms is at 52 days. The median and mean are closer for the sample

firms in the day’s receivable and cash conversion cycle. It can also be seen from the

table above that the standard deviation is the lowest for day’s receivables and the

highest for cash conversion cycle.

4.7 Descriptive Statistics of Working Capital Ratio

54.9447.44

45.49 1.61

322.21

77.77 46.15

148.54

0

1191.980.25

52.85

292.05 7.62

4707.78

52.46 42.45

330.76

-4634.2

1108.39


DEVIATION

MINIMUM MAXIMUM

Days’ Receivable Days’ Inventory Days’ Payable Cash Conversion Cycle (Days)



[b] Trend Analysis

In order to understand the trend in variables of different measures, Trend Analysis has

been studied taking year wise data of accounting variables of sample firms.

Table 4.8

Trend Analysis of Shareholders’ Return

Variable Name Year 1 Year 2 Year

3

Year 4 Year 5 Observed Trend

Shareholders Return

(%)

9.44 -13.50 25.09 -9.84 6.20 Fluctuating

From table 4.8 we can observe that Shareholders’ Return has a fluctuating trend. In

the first year, the average shareholders’ return for the sample firms is at 9.44% which

has fallen down to a negative 13.50% in the second year and it has gone up in the third

year to 25%. The SHR of the firms has gone down to a negative 9.84% in year 4 and

then in fifth year it has increased to 6.20%. It indicates the overall market returns such

that three out of five years giving a positive returns and two of the five years giving a

negative SHR to the shareholders of the sample firms.

4.8 Trend Analysis of Shareholders’ Return

9.44

-13.5

25.09

-9.84

6.2

YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5



Table 4.9

Trend Analysis of Overall Financial Performance Measures

Variable Name Year 1 Year 2 Year 3 Year 4 Year 5 Observed Trend

ROIC (Return on

Invested Capital) (%)

17.54 17.34 14.89 20.63 20.53 Fluctuating

ROE (Return onEquity) (%)

16.62 10.50 12.16 16.64 19.66 Fluctuating

ROA (Return on

Asset) (%)

7.01 6.85 7.07 8.70 8.46 Fluctuating

We can observe from table 4.9 that all the three overall performance variables namely

ROIC, ROE and ROA have the fluctuating trend. The average ROIC of the sample firms

slightly comes down [by 0.20%] in the year 2011 compared to 2010 and it goes down

further in the year 2012 [from 17.34% to 14.89%].The average ROIC of the firms

increase in the year 2013 while compared to that of 2012[from 14.89% to 20.63%].

The average of this variable comes down in the year 2014 in comparison to the 2013

figure [from 20.63% to 20.53%]. The average ROE comes down [from 16.62% to

10.50%] in the year 2011 as compared to 2010 and then its average goes up to 12.16%

from 10.50%. And then the average ROE increases to 16.64% in the fourth year and it

increases further to 19.66% in the fifth year. The ROA goes down to 6.85% in the FY

2011 as compared to 2010 [at 7.01%] and then goes up to 7.07% in the third year. This

figure goes up further in the fourth year to 8.70 % and then goes down in the fifth year

from 8.70% to 8.46%.

4.9 Trend Analysis of indicators of Overall Financial Performance Ratio

17.54 17.34

14.89

20.63 20.53

16.62

10.512.16

16.64

19.66

7.01 6.85 7.078.7 8.46


ROIC (Return on Invested Capital) (%) ROE (Return on Equity) (%) ROA (Return on Asset) (%)



Table 4.10

Trend Analysis of Profitability Ratios


EBITDA (Earnings

before Interest,

Taxes, Depreciation

& Amortization) (%)

20.02 13.71 25.40 23.34 91.20 Fluctuating

EBIT (Earnings

before Taxes) (%)

21.73 14.45 21.67 36.79 140.55 Fluctuating

PBT (Profit before

Tax) (%)

-0.39 28.99 2.93 62.69 88.83 Fluctuating

PAT (Profit after

Tax) (%)

13.33 27.83 32.52 30.61 48.92 Fluctuating

From Table – 4.10 we can infer that EBITDA margin (Earnings before Interest, Taxes,Depreciation & Amortization), EBIT (Earnings before Taxes), PAT (Profit after Tax) and

PBT (Profit before Tax) have fluctuating trend. In the first year EBITDA is at average of

20% and the average goes down in second year [from 20.02% to 13.71%]. In the third

year, the average EBITDA goes up to 25% and then again goes down to 23.34% in the

next year. And In the fifth year the average EBITDA goes higher compared to the

previous years.

The average EBIT margin is about 22% in the first year and in the second year it goes

down to 14%. Then in the third year it goes up from 14.45% to 21.67% and in fourth

year, the average EBIT margin of the firms goes up from 21.67% to 36.79%. And in the

fifth year the average EBIT margin of the firms go up by a higher magnitude to

140.55%.

The average PBT margin is a negative figure at -0.39%. The average EBIT margin

increases to 28.99% in the second year but the average comes down in the third year

and keeps increasing in the fourth and the fifth year.

The average PAT margin increases from 13.33% to 32.52% in the third year. In 2013 it

goes down to 30.61% from 32.52%. But again it follows increasing trend in the fifth

year [from 30.61% to 48.92%].



4.10 Trend Analysis of matrix of Profitability Ratio

Table 4.11

Trend Analysis of Investment Utilization Ratio


Asset

Turnover[Times]

0.98 0.99 1.00 0.98 0.95 Fluctuating

From table 4.11 we can infer that variables of Investment Utilization ratio has

fluctuating trend. Starting from year 2010 to 2012 the average asset turnover has

slightly increased from 0.98 times to 1 time. Then, it goes down in fourth and fifth year

to 0.95 times.

4.11 Trend Analysis of Asset Turnover

20.02 13.71 25.4 23.34

91.2

21.73

14.45

21.67 36.79

140.55

-0.39

28.99

2.93

62.69 88.83

13.3327.83

32.52 30.61

48.92


EBITDA (Earnings before Interest, Taxes, Depreciation & Amortization) (%)

EBIT (Earnings before Taxes) (%)

PBT (Profit before Tax) (%)

PAT (Profit after Tax) (%)

0.98

0.99

1

0.98

0.95




Table 4.12

Trend Analysis of Dividend Ratio


Dividend Payout

Ratio(%)

33.52 23.37 23.23 21.17 24.13 Fluctuating

From Table 4.12 we can observe that the average Dividend payout ratio of the sample

firms has decreased in second, third and fourth year compared to its first year ratio at

33.52% and then goes up in the fifth year to 24.13%.

4.12 Trend Analysis of Dividend Payout Ratio

Table 4.13

Trend Analysis of Financial Condition Ratio


CR (Current

Ratio)[Times]

1.82 1.85 2.03 2.05 5.23 Increasing

QR (Quick Ratio)[Times]

1.21 1.25 1.49 1.42 4.39 Fluctuating

D/E Ratio (Debt

Equity Ratio)

[Times]

0.63 0.70 0.55 1.51 0.76 Fluctuating


[Times]

166.24 132.79 115.35 112.15 57.51 Decreasing

33.52

23.37 23.23

21.17

24.13




From table 4.13 it can be observed that Current Ratio follows increasing trend. CR goes

up to 5.23% in the 2014 from 1.82% in the 2010. Quick Ratio and D/E Equity Ratio both

have fluctuating trends. QR goes up in second and third year and then goes down in

fourth year. In fifth year it remains at 4.39% comparing previous years. In 2010 average

D/E ratio is .63% which goes up in 2011 and then goes down in 2012. In fourth year

again it goes up from 0.55% to 1.51% and then again in 2014 it goes down [from 1.51%

to 0.76%]. Interest Cover Ratio has decreasing trend. In 2010 average Interest Cover

Ratio is 166% which goes on decreasing and is around 58% in 2014.

4.13 Trend Analysis of Financial Condition Ratio

1.82

1.85

2.03 2.05 5.23

1.21

1.25

1.491.42

4.39

0.63

0.7

0.55

1.51 0.76

166.24

132.79

115.35112.15

57.51

1 2 3 4 5

CR (Current Ratio)[Times] QR (Quick Ratio) [Times]

D/E Ratio (Debt Equity Ratio) [Times] Interest Cover Ratio

[Times]



Table 4.14

Trend Analysis of Working Capital Ratio


Days’ Receivable 58.90 56.33 52.53 51.34 55.67 Fluctuating

Days’ Inventory 80.32 78.98 79.39 74.34 76.16 Fluctuating

Days’ Payable 59.69 58.28 90.29 86.38 107.10 FluctuatingCash Conversion

Cycle (Days)

79.52 76.51 41.98 39.64 24.73 Decreasing

From table 4.14 it can be observed that average days’ receivable decreases in 2011,

2012 and 2013 and comes to 51.34% from 58.90% in comparison of 2010 and again

goes up in 2014 by 8.43%. Days’ Inventory in first year is 80.32% which goes down in

second year [from 80.32% to 78.98%]. In third year the average increases by 0.51%

[from 78.98% to 79.39%]. Again in fourth year the average goes down to 74.34% [from

79.39%] which again increases by 2.44% in fifth year. Cash Conversion Cycle has

decreasing trend. Average CCC goes down to 24.73% in the fifth year from 79.52% in

the first year.

4.14 Trend Analysis of Working Capital Ratio

58.956.33

52.53

51.3455.67

80.32 78.9879.39

74.34

76.16

59.6958.28 90.29 86.38

107.1

79.52 76.51

41.9839.64

24.73


Days’ Receivable Days’ Inventory Days’ Payable Cash Conversion Cycle (Days)



[c] Correlation

To understand the relationship between dependent and independent variable

correlation has been studied.

Table 4.15

Correlation between Shareholders’ Return and Overall Performance Ratio

Return on

Invested Capital

(ROIC)

Return on

Equity (ROE)

Return on

Asset (ROA)

Shareholders'

Return (%)

Return on

Invested Capital

(ROIC) 1

Return onEquity (ROE) 0.550 1

Return on Asset

(ROA) 0.772 0.643 1

Shareholders'

Return (%) 0.172 0.164 0.217 1

In Table 4.15 we have shown correlation between Shareholders’ Return and the

Overall Performance Ratios. We can observe that there is a very low degree of positive

correlation between shareholders’ return and the overall performance ratios i.e. ROIC,

ROE and ROA.

4.15 Correlation between Shareholders’ Return and Overall Performance Ratio

0.1720.164

0.217

RETURN ON INVESTED

CAPITAL (ROIC)

RETURN ON EQUITY (ROE) RETURN ON ASSET (ROA)



Table 4.16

Correlation between Shareholders’ Return and Profitability Ratio

Earnings before

Interest, Taxes,

Depreciation &Amortization

(EBITDA)

Earnings

beforeInterest

(EBIT)

ProfitBefore

Tax (PBT)

ProfitAfter Tax

(PAT)

Shareholders

' Return (%)

EBITDA 1

EBIT 0.631 1

PBT 0.024 0.019 1

PAT 0.428 0.378 0.012 1

Shareholders

’ Return (%)

0.014 0.018 -0.031 0.011 1

From Table 4.16 it can be observed that Shareholders’ Return is positively correlated

with EBITDA, EBIT and PAT margins of the sample firms. But there is a negative

correlation between Shareholders’ Return and PBT margin.

4.16 Correlation between Shareholders’ Return and Matrix of Profitability Ratio

0.014

0.018

-0.031

0.011

EARNINGS BEFORE

INTEREST, TAXES,

DEPRECIATION &

AMORTIZATION (EBITDA)

EARNINGS BEFORE

INTEREST (EBIT)

PROFIT BEFORE TAX (PBT) PROFIT AFTER TAX (PAT)



Table 4.17

Correlation between Shareholders’ Return and Investment Utilization Ratio

Asset Turnover Shareholders' Return (%)

Asset Turnover 1

Shareholders'

Return (%) 0.190 1

From Table 4.17 it can be inferred that the asset turnover is positively correlated with

Shareholders’ Return.

4.17 Correlation between Shareholders’ Return and Matrix of Investment Utilization Ratio

Table 4.18

Correlation between Shareholders’ Return and Dividend Ratio Dividend Payout Ratio Shareholders' Return (%)

Dividend Payout Ratio 1

Shareholders' Return

(%) -0.056 1

In table 4.18 we have shown correlation between Shareholders’ Return and Dividend

Ratio. It can be inferred that there is a negative correlation between the shareholders’

return and Dividend Payout Ratio.

0.19

ASSET TURNOVER



4.18 Correlation between Shareholders’ Return and Dividend Payout Ratio

Table – 4.19

In Table – 4.19 we have shown correlation between shareholders’ return and variables

of financial condition ratio. We can observe from the data that shareholders’ return is

negatively correlated with current ratio and quick ratio. Whereas it is positively

correlated with debt/equity ratio.

4.19 Correlation between Shareholders’ Return and Financial Condition Ratio

-0.056

DIVIDEND PAYOUT

RATIO

-0.026

-0.084

0.005

-0.029CURRENT RATIO QUICK RATIO DEBT/EQUITY RATIO INTEREST COVER

RATIO

Correlation between Shareholders’ Return and Financial Condition Ratio

Current

Ratio Quick Ratio

Debt/Equity

Ratio

Interest

Cover

Ratio

Shareholder

s' Returns

(%)

Current Ratio 1

Quick Ratio 0.868 1

Debt/Equity Ratio -0.063 -0.055 1

Interest Cover

Ratio 0.021 0.040 -0.077

1

Shareholders'

Returns (%) -0.026 -0.084 0.005 -0.029 1



Table 4.20

Correlation between Shareholders’ Return and Working Capital Ratio

Days'

Receivable

Days'

Inventory

Days'

Payable

Cash

Conversion

Cycle

Shareholders

' Return (%)

Days'Receivable 1

Days'

Inventory 0.278 1

Days' Payable 0.082 0.019 1

Cash

Conversion

Cycle 0.190 0.471 -0.863 1

Shareholders'

Return (%) -0.159 -0.094 -0.077 0.003 1

From Table 4.20 we observe that shareholders’ return is negatively correlated with thevariables of days’ receivable, days’ inventory, and days’ payable and positively

correlated with cash conversion cycle. These results are consistent with the view that

the shorter the period between production and sales of products the larger is the firm’s

profitability and thereby the returns to the shareholders. But the number of days of

payable is supposed to have a positive correlation as increase in days’ payables releases

more funds in the hands of the organization which is supposed to get resulted in higher

accounting profits and thereby higher shareholders returns. Shareholders return is

negatively correlated with days’ inventory relating the conceptual understanding of

increased day’s inventory getting resulted in decreased accounting profits and thereby

decreased shareholder return.

4.20 Correlation between Shareholders’ Return and Working Capital Ratio

-0.159

-0.094

-0.077

0.003

DAYS' RECEIVABLE DAYS' INVENTORY DAYS' PAYABLE CASH CONVERSION

CYCLE



[d] Regression

So far we have established the framework of literature and data analysis in order to

investigate the impact of accounting variables on shareholders’ returns. In order to

further strengthen our argument on the relationship between the accounting variables

and shareholders’ return we have used regression analysis.

The objective of our work is to establish a causal relationship between the identified

accounting variables (Independent Variables) and shareholders’ return (Dependent

Variable). In order to validate our work the causal relationship has been established

using multiple linear regression analysis. Moreover for robustness the analysis has

been carried taking five years’ average data of each accounting variable results of

which are reported below.

Regression analysis has been studied using year wise data of accounting variables of

sample companies listed in Bombay Stock Exchange. The analysis is based on the five

years’ data for the sample firms on all the variables considered by the study. In running

the analysis, SPSS software has been used following backward method of linear

multiple regression to discard irrelevant information from the analysis and best fit

model is depicted in the table. Confidence interval (C.I) is to taken to be 95% for allfive years’ data. In our model, the shareholders’ returns are regressed against

accounting variables of the sample firms.

Y= α +β1X1 + β2X2 + β3X3…………..βnXn

Where:

Y = Shareholders’ Return

Xi = the variable that we are using to predict Y

α, βi = Regression Parameters

This section also tests the various alternate hypotheses formulated by the researcher

in order to accomplish the objectives of the research.



H1: There is significant relationship between shareholders’ return and overall financial

performance indicators.

Table - 4.21

Coefficients

Model Unstandardized

Coefficients

Standardized

Coefficients

t Sig.

B Std. Error Beta

(Constant) 1.551 .749 2.072 .039

ROA .219 .124 .186 1.767 .078

ROE .015 .029 .042 .518 .605

ROCE .002 .036 .005 .053 .958

Dependent Variable: Shareholders' Return

R-Square = .048

S.R. = 1.551+ .219*ROA + .015*ROE +.002*ROCE

The regression results presented in Table (4.21) above is indicating that coefficients of the

return on assets (ROA) variable is at .219, the return on equity (ROE) variable at 0.015 and

that of the return on capital employed (ROCE) variable is at .002 . All three overall

performance ratios have a positive relationship with shareholders’ return which reveals

that an increase in the return on asset, equity and employed capital will generate more

profits for a company as well for the shareholders. It is also noted that the R-Square value

is at 0.048 which is quite a low value. Further, the p value ROE & ROCE are quite high even

though the p value of ROA is significant. Hence, we cannot accept the first hypothesis that

there is a significant statistical relationship between all indicators of overall financial

performance and shareholders’ return. However ROA has a statistically significant

relationship with the shareholders’ return.

4.21 Regression between Shareholders’ Return and matrix of Overall Financial Performance

0.219

0.0150.002 S

h a r e h o l d e r s ' R e t u r n



H2: There is significant relationship between shareholders’ return and indicators of

profitability ratio.

Table - 4.22

Coefficients Model Unstandardized

Coefficients

Standardized

Coefficients

t Sig.

B Std. Error Beta

(Constant) 3.473 .550 6.316 .000

EBITDA .000 .005 .003 .042 .967

EBIT .001 .004 .015 .187 .852

PBT -.001 .002 -.032 -.505 .614

PAT .000 .003 .004 .060 .952


R-Square = .001

S.R. = 3.473+ .000*EBITDA + .001*EBIT -.001*PBT+.000*PAT

The regression equation shows that there is a positive relationship between EBITDA, EBIT

& PAT margin and shareholders’ return which is consistent with the view that increase in

earnings of companies will lead to increase in shareholders’ return. The table above

indicates the coefficients of the EBITDA at .000, EBIT at .001, PAT at .000 and PBT at -.001.

PBT margin has a negative coefficient indicating a negative relationship with the

shareholders’ return. It is also noted that the R-Square value is at 0.001 which is a very

low value. Further the p value of all the profitability ratios is quite higher and hence, we

cannot accept the second hypothesis that there is a significant statistical relationship

between the variables of profitability ratios and shareholders’ return.

4.22 Regression between Shareholders’ Return and matrix of Profitability Ratio

00.001

-0.001

0

EBITDA EBIT PBT PAT

Series1 Series2



H3: There is significant relationship between shareholders’ return and investment

utilization matrix.

Table - 4.23

Coefficients


Coefficients

Standardized

Coefficients

t Sig.

B Std. Error Beta

(Constant) 1.320 .862 1.532 .127

Asset

Turnover2.207 .709 .190 3.113 .002


R-Square = .036

S.R. = 1.320+ 2.207*Asset Turnover

The regression results presented in Table (4.3) above is indicating that the coefficient

of the asset turnover is at 2.207 which indicates a positive relationship between asset

turnover and shareholders’ returns which insists the fact that growth in asset turnover

generates higher income to shareholders. It is also noted that the R-Square value is

0.036. The p value of the variable is 0.002 and hence, we can accept the third

hypothesis that there is a statistically significant relationship between asset turnoverand shareholders’ return.

4.23 Regression between Shareholders’ Return and matrix of Investment Utilization Ratio

2.207

ASSET TURNOVER

S h a r e h o l d

e r s ' R e t u r n



H4: There is significant relationship between shareholders’ return and investment

utilization matrix.

Table - 4.24

Coefficients Model Unstandardized

Coefficients

Standardized

Coefficients

t Sig.

B Std. Error Beta

(Constant) 3.826 .649 5.896 .000

Dividend Payout

Ratio-.014 .015 -.056 -.895 .372

Dependent Variable: Shareholders' ReturnR-Square = .003

S.R. = 3.826 - .014* Dividend Payout Ratio

From the regression equation it can be observed that the coefficient of dividend

payout ratio is at -.014. There is a negative relationship between dividend payout ratio

and shareholders’ return which is consistent with the view that market observers often

view low dividend payout as a signal for high future earnings growth. The rationale is

that companies pay fewer dividends or retain more earnings when growth

opportunities are ample so low payout indicates the possibility of a strong future

earnings growth. The value of R square is 0.003 which is very low and the variable’s p

value is higher and hence, we cannot accept the fourth hypothesis that there is a

significant statistical relationship between dividend payout ratio and shareholders’

return.

4.24 Regression between Shareholders’ Return and Dividend Payout Ratio

-0.014

DIVIDEND PAYOUT RATIO



H5: There is significant relationship between shareholders’ return and financial

condition matrix.

Table - 4.25

Coefficients


Coefficients

Standardized

Coefficients

t Sig.

B Std. Error Beta

(Constant) 3.576 .627 5.701 .000

CR .302 .198 .191 1.526 .128

QR -.445 .224 -.249 -1.985 .048

D/E -.002 .219 -.001 -.010 .992

Interest Cover .000 .001 -.022 -.350 .727


R-Square = .017

S.R. = 3.576 + .302*CR - .445*QR -.002*D/E + .000*Interest Cover

The regression results presented in Table (4.5) above is indicating that the coefficients

of the Current Ratio is .302, of quick ratio is -.445, of D/E ratio is -.002 and of interest

cover ratio is .000. We can see that there is positive relationship of Current ratio and

of Interest Cover ratio with Shareholders’ return. And Quick ratio and D/E ratio are

negatively related with shareholders’ return. Current ratio being positively related

with shareholders’ return indicates that the higher the current ratio & interest cover

ratio, the more capable the company is of paying its obligations.

However, quick ratio and debt-equity ratio are having negative relationship with

shareholders ‘return which is indicated by their negative coefficient sign. Quick ratio

having negative relationship with shareholders’ return is contradictory to the

conceptual relationship it has with shareholders’ return.

It is also noted that the R-Square value is 0.017 and all the ratios except quick ratio

have a significant p value and hence, we cannot accept the fifth hypothesis that all the

indicators of the financial condition are significantly related with shareholders’ return.



However, the p-value for QR (-.445) is lower than the common alpha level of 0.05

which indicates that QR is statistically significant.

4.25 Regression between Shareholders’ Return and Financial Condition Ratio

H6: There is significant relationship between shareholders’ return and measures of

working capital ratio.

Table - 4.26

Coefficients


Coefficients

Standardized

Coefficients

t Sig.

B Std. Error Beta

(Constant) 5.270 .819 6.437 .000

Days' Receivable -.027 .012 -.149 -2.319 .021

Days' Inventory -.005 .004 -.087 -1.219 .224

Cash Conversion

Cycle.002 .002 .073 1.040 .300

Dependent Variable: Shareholders' ReturnR-Square = .032

Table - 4.27

Excluded Variablesa

Model Beta In t Sig. Partial

Correlation

Collinearity Statistics

Tolerance

0.302

-0.445

-0.002

0

CR QR D/E INTEREST COVER

S h a r e h o l d e r s ' R e t u r n



Days'

Payable-98.184b -.489 .625 -.031 9.404E-008

a. Dependent Variable: Shareholders' Return

b. Predictors in the Model: (Constant), Cash Conversion Cycle, Days' Receivable,

Days' Inventory

S.R. = 5.270 - .027* Days’ Receivable -.005*Days’ Inventory+.002*CCC

From the regression equation it can be observed that the coefficient of Days’

receivable, Days’ Inventory & Cash Conversion Cycle is at -.027, -.005 & .002

respectively. We can see that the days’ receivable ratio is negatively related with the

shareholders’ return and there is a statistically significant relationship between days’

receivable and shareholders’ return [ as its p value is less ]which is consistent with the

view that over-investment in accounts receivable can be costly and can negatively

affect companies and its shareholders. It can be observed from the table 4.7 that

model has excluded days’ payable as this variable is highly correlated with other

variables. Value of R square is 0.032 which is quite low and the p value of days

inventory and ccc are quite high and hence we cannot accept the hypothesis which

states that there is a significant relationship between shareholders’ return and

measures of working capital of the sample firms

4.26 Regression between Shareholders’ Return and Working Capital Ratio

-0.027

-0.005

0.002

1 2 3

Days' Receivable Days' Inventory Cash Conversion Cycle



Chapter 5: Findings and Inferences



5. Findings and Inferences

This chapter presents the major findings and inferences made by the researcher based

on the results of the data analysis performed for the collected data

1. The average shareholders’ return of the sample firms was at 3.47% which is slightly

higher than the median for the variable at 2.45%.

2. The mean for ROIC, ROE and ROA is at 18.18%, 15.11% and 7.61% respectively and

the standard deviation of the said variables is at 22.42%, 23.50% and 7.11%. The

median for these variables is at 15.90%, 15.75% and 6.33%. ROIC is in the range

between -240.10% and 148.63%. ROE is in the range between -174.92% and

116.98%. And ROA is in the range between -26.37% and 30.75% for the sample

firms.

3. The mean of sample firms’ EBITDA, EBIT, PBT and PAT margins is at 34.73%,

47.03%, 32.90% and 36.61% respectively. Median of EBITDA, EBIT, PBT and PAT is

at 17.16%, 19.10%, 12.05% and 19.33%. Range of EBITDA is between -143.87% to2101.94%. Range of EBIT is between -852.11% and 1923.89%. Range of PBT is

between -101.45% and 2976.94%. Range of PAT is between -1480% and 1263.57%.

Standard deviation is the lowest for the EBITDA margin while it is the highest for

the PBT margin of the sample firms.

4.

The sample firms’ average turnover on asset is 0.97 times with maximum

observation of 4.18 times and a minimum observation of zero times. The sample

firms have a standard deviation of 0.722.

5. It is observed that an average of 25% dividend has been paid to the shareholders

with maximum observed payout ratio of 400%. It can be seen that the median



payout ratio of the sample firms is at 21.69% which is close to the mean payout

ratio. The standard deviation for the sample firms is at 33.67% on this metric.

6. The sample firms have average current assets that are about 2.59 times to pay the

current liabilities with a maximum of 59 times and a minimum of 0.27 times.

7. The firms’ ability to meet their short-term obligations with its most liquid assets is

at 2 times with a median quick ratio of 1.1 times with a maximum of 59 times and

a minimum of 0.24 times.

8. The sample firms have an average debt-equity ratio of 0.82 times and the ratio

ranges between -4.80 times and 33.63 times. The firms’ average interest coverage

ratio is 132 times with a maximum observation of 4927 times and a minimum

observation of -549 times.

9. The average outstanding days with the customers of the sample firms are about 55

days whereas the average due days to the suppliers by the sample firms are 80

days. It is also inferred that the sample firms have an average day’s inventory isaround 78 days. The five year average cash conversion cycle of the sample firms is

at 52 days.

10. Three out of five years has given positive returns and two of the five years has given

a negative SHR to the shareholders of the sample firms during the period of

observation. The average shareholders’ return for the sample firms is at 9.44%

which has fallen down to a negative 13.50% in the second year and it has gone up

in the third year to 25%. The SHR of the firms has gone down to a negative 9.84%

in year 4 and then in fifth year it has increased to 6.20%.



11. All the three overall performance variables namely ROIC, ROE and ROA have the

fluctuating trend during the study period. The average ROIC of the sample firms

slightly comes down [by 0.20%] in the year 2011 compared to 2010 and it goes

down further in the year 2012 [from 17.34% to 14.89%].The average ROIC of the

firms increase in the year 2013 while compared to that of 2012[from 14.89% to

20.63%]. The average of this variable comes down in the year 2014 in comparison

to the 2013 figure [from 20.63% to 20.53%].

12. The average ROE comes down [from 16.62% to 10.50%] in the year 2011 as

compared to 2010 and then its average goes up to 12.16% from 10.50% in the FY

2012. And then the average ROE increased to 16.64% in FY 2013 and it increased

further to 19.66% in FY 2014.

13. The ROA came down to 6.85% in the FY 2011 as compared to FY 2010[at 7.01%]

and then it went up to 7.07% in FY 2012. This figure has gone up further in FY 2012

and then came down to 8.46% in FY 2014.

14.

All the profitability ratios are observed to be having a fluctuating trend in the fiveyears period of time considered by the study.

15. The Asset Turn ratio has a fluctuating trend during the period of the study.

16. The dividend payout ratio of the sample firms is in the fluctuating trend during FY

2010 to FY 2014.

17. Among the financial condition ratios, the current ratio has an increasing trend

during the five years considered by the study. The Interest Cover ratio has a

decreasing trend during this period while the quick ratio and the Debt to Equity

ratio of the sample firms have shown a fluctuating trend.



18. All the three components of the cash conversion cycle have shown a fluctuating

trend while the cash conversion cycle has exhibited a decreasing trend during the

study period.

19. There is a very low degree of positive correlation between shareholders’ return

and the overall performance ratios i.e. ROIC, ROE and ROA.

20. The shareholders’ Return is positively correlated with EBITDA, EBIT and PAT

margins of the sample firms. But there is a negative correlation between

Shareholders’ Return and PBT margin.

21. The asset turnover is positively correlated with Shareholders’ Return. It can be

inferred that there is a negative correlation between the shareholders’ return and

Dividend Payout Ratio of the sample firms.

22. The shareholders’ return is negatively correlated with current ratio and quick ratio

whereas it is positively correlated with debt/equity ratio and the interest coverageratio.

23. The shareholders’ return is negatively correlated with the days’ receivable, days’

inventory, and days’ payable and positively correlated with cash conversion cycle

of the sample firms.

24.

All three overall performance ratios have a positive relationship with shareholders’

return which reveals that an increase in the return on asset, equity and employed

capital will generate more profits for a company as well for the shareholders. There

is no significant statistical relationship between all indicators of overall financial



performance and shareholders’ return. However ROA has a statistically significant

relationship with the shareholders’ return.

25. There is a positive relationship between EBITDA, EBIT & PAT margin of the sample

firms and the shareholders’ return which is consistent with the view that increase

in earnings of companies will lead to increase in shareholders’ return.

26. The PBT margin of the sample firms has a negative coefficient indicating a negative

relationship with the shareholders’ return. However there is no significant

statistical relationship between the variables of profitability ratios and

shareholders’ return.

27. There is a positive relationship between the asset turnover of sample firms and the

shareholders’ returns which insists the fact that growth in asset turnover generates

higher income to shareholders. However there is no statistically significant

relationship between asset turnover of the sample firms and shareholders’ return.

28.

There is a negative relationship between dividend payout ratio and shareholders’return which is consistent with the view that market observers often view low

dividend payout as a signal for high future earnings growth. The rationale is that

companies pay fewer dividends or retain more earnings when growth

opportunities are ample so low payout indicates the possibility of a strong future

earnings growth. However, there is no significant statistical relationship between

dividend payout ratio and shareholders’ return.

29. There is positive relationship of Current ratio and of Interest Cover ratio with

Shareholders’ return. And Quick ratio and D/E ratio are negatively related with

shareholders’ return. The indicators of the financial condition are not significantly

related with shareholders’ return.



Chapter 6: Conclusion and Scope for Further Research



This chapter concludes on the research work and spells out the possible

areas for future research work.

This study examines the determinants of shareholders’ return with special reference

to 260 sample firms of Bombay Stock Exchange. The analyses are performed using data

derived from ACE Equity Software for five financial years (AY 2010 to 2014). The

analysis of relationship between the shareholders’ return and the accounting

performance measures [independent variables ]such as ROE, ROCE, EBITDA, EBIT, PAT,

D/E Ratio, Cash Conversion Cycle indicates a positive but no statistically significant

relationship between SHR and these accounting variables. This research work shows

that there is statistically significant relationship between the accounting variables such

as days’ receivable, Quick Ratio, Asset Turnover, Return on Asset of the sample firms

and the Shareholders’ return. This study adds value to the existing body of literature

(Deloof) who found the negative relationship between profitability and number of

days of accounts receivable, inventories and accounts payable of Belgian firms for the

period1992-1996. The negative relationship between accounts receivables and firms'

profitability suggests that profitable firms will pursue a decrease of their accounts

receivables in an attempt to reduce their cash gap in the cash conversion cycle. The

research supports the findings of Lamberson(1995), Singh &Pаndеy (2008) who

insisted on good asset management in order to generate income to shareholders.

This study reveals that shareholders returns are positively related with return on asset

which is supportive for the findings of AL Khalayleh (2001) who concluded that there

is significant positive relationship between the market price per share with the ratios

of return on assets and return on equity.

SCOPE FOR FURTHER RESEARCH

Further studies can be carried out on



- The impact of accounting performance measures of companies operating in

different industries and shareholders’ return

- The impact of size of the firm on the relationship between the accounting

performance variables and the shareholders’ return

-

The relationship between the relative valuation multiples and the shareholders’

return

- The role of macroeconomic variables in determining the relationship between the

accounting performance measures and the shareholders’ return

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