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Hypothesis
3.7
Empirical Analysis
The analysis will cover sample 100 firm-year observations which will be analyzed through multiple
regression using the least square method. In this multiple regression, there will be employed more
than one variables which are considered to have the effect on the dependent variable.
Global F-test will be used to investigate whether any of the independent variables have significant
coefficients.
Some of the independent variables in the equation may have no or significant effect on the
dependent variable. The significance of the individual variables in this study will be tested using Ttest. This test will tell us that whether individual independent variable is able to influence the
dependent variable or not.
3.8
Use of Software
Microsoft excel is used to reformulate balance sheets & income statements and analyze the profitability
of companies.
SPSS is used to determine correlation coefficients of variable and to do regression analysis.
Sample Companies
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Stylecraft Limited
Spinning
Ready-made Garments
4.2
4.2.1
RNOA
ROCERNOA
FLEV
Financial
Spread
NBC
ROOA
RNOAROOA
OLE
V
2005
2.28%
2006
2.14%
2007
1.63%
2008
0.92%
2009 -9.35%
2010 -15.44%
2011
0.96%
2012 -1.10%
2013 -13.64%
2014 25.79%
6.38%
6.68%
5.62%
5.31%
2.28%
2.01%
8.03%
6.96%
6.41%
6.80%
-4.10%
-4.54%
-3.99%
-4.39%
-11.63%
-17.45%
-7.07%
-8.06%
-20.05%
18.99%
0.53
0.65
1.35
2.20
1.77
1.79
2.34
2.77
3.95
3.91
-7.70%
-7.01%
-2.94%
-1.99%
-6.58%
-9.73%
-3.03%
-2.91%
-5.08%
4.86%
14.08%
13.69%
8.56%
7.30%
8.87%
11.74%
11.06%
9.87%
11.49%
1.95%
5.60%
5.78%
5.24%
5.18%
2.86%
2.84%
6.77%
6.17%
6.04%
6.37%
0.78%
0.90%
0.38%
0.13%
-0.58%
-0.83%
1.26%
0.80%
0.38%
0.43%
0.58
0.59
0.39
0.14
0.42
0.59
0.50
0.42
0.21
0.20
Year
Operati
ng
Spread
1.35%
1.53%
0.99%
0.93%
-1.39%
-1.41%
2.52%
1.92%
1.79%
2.12%
Year
ROCE
RNOA
ROCERNOA
FLEV
Financial
Spread
2005
17.36%
17.94%
-0.58%
0.16
2006
2007
2008
15.58%
14.36%
17.42%
3.24%
3.43%
3.35%
15.85%
15.37%
15.83%
5.99%
5.98%
5.56%
-0.27%
-1.02%
1.58%
-2.75%
-2.55%
-2.21%
0.13
0.30
0.39
0.27
0.18
0.09
4.99%
4.04%
6.70%
5.76%
5.20%
4.63%
-0.77%
-1.16%
2.08%
0.06
0.08
0.08
2009
2010
2011
2012
2013
2014
NBC
ROOA
RNOAROOA
OLEV
Operating
Spread
-3.69%
21.63%
11.64%
6.31%
0.85
7.39%
-2.14%
-3.44%
4.06%
-10.01%
-14.29%
-25.83%
17.99%
18.82%
11.77%
15.99%
20.27%
31.39%
10.12%
10.32%
10.77%
5.19%
5.19%
4.85%
5.73%
5.06%
5.06%
0.80%
0.79%
0.71%
0.98
0.83
0.78
0.84
0.84
1.17
5.87%
6.07%
6.52%
0.94%
0.94%
0.60%
-11.89%
-14.22%
26.98%
17.65%
19.42%
-22.35%
4.87%
4.64%
4.40%
0.88%
0.56%
0.22%
1.41
1.42
1.46
0.62%
0.39%
0.15%
4.2.3
Year
ROCE
RNOA
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
1.47%
-3.26%
-5.82%
-21.78%
10.34%
8.48%
5.99%
7.36%
6.52%
7.10%
5.93%
4.75%
2.82%
-3.85%
5.31%
8.67%
3.69%
4.73%
6.82%
7.57%
ROCERNOA
-4.46%
-8.01%
-8.63%
-17.93%
5.02%
-0.19%
2.30%
2.63%
-0.31%
-0.47%
RNOAROOA
0.12%
0.04%
-0.20%
-1.40%
0.28%
0.86%
-0.05%
0.02%
0.08%
0.13%
OLEV
0.05
0.09
0.16
0.21
0.36
0.24
0.10
0.06
0.03
0.04
Operatin
g Spread
2.31%
0.45%
-1.24%
-6.70%
0.78%
3.55%
-0.51%
0.45%
2.49%
3.19%
4.2.4
Year
ROCE
RNOA
ROCERNOA
FLEV
Financial
Spread
NBC
ROOA
RNOAROOA
OLEV
Operating
Spread
2005
5.64%
7.16%
-1.52%
0.43
-3.52%
2006
10.68%
5.96%
1.20%
0.49
2.46%
6.19%
6.44%
-0.24%
0.77
2007
7.37%
9.12%
-1.75%
1.03
-0.31%
6.75%
5.76%
0.68%
0.45
1.51%
-1.70%
10.82%
7.44%
1.68%
0.53
3.19%
2008
8.57%
9.62%
-1.04%
2009
9.33%
12.22%
-2.90%
0.97
-1.07%
10.69%
7.37%
2.25%
0.72
3.12%
0.94
-3.08%
15.30%
8.46%
3.77%
0.89
4.21%
2010
11.26%
14.05%
-2.79%
0.94
-2.98%
17.03%
9.14%
4.91%
1.01
4.89%
2011
18.95%
2012
14.97%
20.35%
-1.40%
0.72
-1.93%
22.28%
11.71%
8.64%
1.16
7.46%
19.45%
-4.48%
0.43
-10.54%
29.99%
10.73%
8.72%
1.35
6.48%
2013
2014
15.04%
17.97%
-2.92%
0.39
-7.58%
25.55%
10.33%
7.63%
1.26
6.08%
12.38%
13.44%
-1.07%
0.48
-2.24%
15.69%
8.64%
4.81%
1.10
4.39%
Year
ROCE
RNOA
ROCERNOA
FLEV
Financial
Spread
NBC
ROOA
RNOAROOA
OLEV
Operating
Spread
2005
4.10%
9.06%
-4.96%
1.49
-3.32%
12.39%
6.90%
2.16%
0.64
3.40%
2006
8.72%
10.76%
-2.04%
2007
1.87
-1.09%
11.85%
8.33%
2.43%
0.60
4.08%
9.15%
12.74%
2008
8.77%
14.80%
-3.59%
1.69
-2.13%
14.87%
9.26%
3.48%
0.70
5.01%
-6.03%
1.40
-4.30%
19.10%
10.05%
4.74%
0.82
5.80%
2009
10.16%
2010
13.08%
-2.93%
1.28
-2.29%
15.37%
8.81%
4.27%
0.94
4.56%
2011
24.74%
20.83%
3.91%
0.98
3.99%
16.84%
12.22%
8.61%
1.08
7.97%
23.33%
22.35%
0.98%
0.70
1.40%
20.95%
12.24%
10.11%
1.27
7.99%
2012
21.29%
27.54%
-6.24%
0.36
4.86%
22.67%
17.33%
10.21%
0.78
13.08%
2013
15.01%
16.95%
-1.94%
0.19
-10.01%
26.97%
12.39%
4.56%
0.56
8.14%
2014
13.68%
15.19%
-1.51%
0.17
-8.84%
24.03%
11.75%
3.44%
0.46
7.50%
10
4.2.6
Year
ROCE
RNOA
ROCERNOA
FLEV
Financial
Spread
NBC
ROOA
RNOAROOA
OLEV
Operating
Spread
2005
1.88%
2.64%
-0.76%
0.87
2006
3.62%
4.05%
-0.43%
0.82
-0.87%
3.52%
2.70%
-0.06%
0.20
-0.30%
-0.52%
4.56%
4.08%
-0.03%
0.21
-0.17%
2007
4.66%
4.86%
-0.20%
2008
6.04%
5.81%
0.24%
0.73
-0.28%
5.14%
4.74%
0.12%
0.23
0.49%
0.66
0.36%
5.45%
5.47%
0.34%
0.28
1.22%
2009
2.22%
3.94%
-1.72%
0.48
-3.61%
7.55%
3.99%
-0.05%
0.17
-0.26%
2010
2.15%
2011
2.93%
3.75%
-1.60%
0.35
-4.53%
8.28%
3.81%
-0.06%
0.14
-0.44%
5.19%
-2.26%
0.32
-6.97%
12.16%
5.06%
0.13%
0.16
0.81%
2012
2013
1.67%
4.44%
-2.77%
0.34
-8.17%
12.62%
4.41%
0.03%
0.17
0.16%
2014
2.06%
5.63%
-3.57%
0.31
-11.41%
17.04%
5.37%
0.27%
0.24
1.12%
2.03%
5.80%
-3.76%
0.40
-9.47%
15.27%
5.57%
0.23%
0.18
1.32%
4.2.7
Year
ROCE
RNOA
ROCERNOA
FLEV
Financial
Spread
NBC
ROOA
RNOAROOA
OLEV
Operating
Spread
2005
2.67%
4.79%
-2.12%
0.71
-2.99%
7.78%
4.72%
0.08%
0.06
1.22%
2006
2.90%
5.22%
-2.32%
0.88
-2.64%
7.86%
5.21%
0.01%
0.01
0.96%
2007
3.48%
6.48%
-3.00%
0.96
-3.13%
9.60%
6.45%
0.02%
0.01
2.20%
2008
-29.48%
-5.87%
-23.61%
1.36
-17.41%
11.53%
-5.80%
-0.08%
0.01
-10.05%
2009
-41.40%
-4.79%
-36.60%
2.28
-16.08%
11.29%
-4.66%
-0.13%
0.01
-8.91%
2010
-11.15%
6.57%
-17.72%
3.26
-5.44%
12.00%
6.52%
0.04%
0.02
2.27%
2011
21.69%
12.99%
8.71%
2.85
3.05%
9.93%
12.66%
0.33%
0.04
8.41%
2012
7.25%
8.45%
-1.21%
0.80
-1.50%
9.96%
8.23%
0.22%
0.06
3.98%
2013
5.09%
5.77%
-0.67%
0.47
-1.44%
7.20%
5.67%
0.10%
0.07
1.42%
2014
5.42%
6.39%
-0.97%
0.45
-2.16%
8.55%
6.26%
0.13%
0.07
2.01%
11
Year
ROCE
RNOA
ROCERNOA
ROOA
RNOAROOA
OLEV
Operating
Spread
2005
6.93%
7.65%
-0.72%
4.06
-0.18%
7.83%
7.42%
0.24%
0.06
3.92%
2006
6.92%
8.44%
-1.52%
3.83
-0.40%
8.84%
7.94%
0.51%
0.14
3.69%
2007
4.82%
1.08%
3.74%
3.34
1.12%
-0.04%
1.76%
-0.68%
0.27
-2.49%
2008
-4.61%
-1.05%
-3.56%
3.48
-1.02%
-0.03%
0.43%
-1.47%
0.39
-3.82%
2009
6.72%
7.89%
-1.18%
4.14
-0.28%
8.18%
7.01%
0.89%
0.32
2.76%
2010
3.29%
6.52%
-3.23%
1.34
-2.40%
8.92%
6.13%
0.40%
0.21
1.88%
2011
1.96%
5.71%
-3.75%
0.65
-5.77%
11.49%
5.42%
0.29%
0.25
1.17%
2012
0.78%
4.68%
-3.90%
0.61
-6.41%
11.09%
4.59%
0.09%
0.26
0.34%
2013
-2.38%
4.01%
-6.38%
0.68
-9.34%
13.34%
4.05%
-0.04%
0.21
-0.20%
2014
-6.65%
0.78%
-7.43%
0.76
-9.74%
10.52%
1.31%
-0.53%
0.18
-2.94%
12
4.2.9
Stylecraft Limited
Stylecraft Limited
Year
ROCE
RNOA
ROCERNOA
FLEV
Financial
Spread
NBC
ROOA
RNOAROOA
OLEV
Operating
Spread
2005
3.82%
4.97%
-1.15%
0.51
-2.28%
7.25%
4.71%
0.26%
0.57
0.46%
2006
5.23%
8.38%
-3.16%
2007
0.62
-5.05%
13.44%
6.81%
1.57%
0.61
2.56%
3.58%
6.84%
2008
3.99%
7.81%
-3.26%
0.74
-4.42%
11.26%
5.89%
0.95%
0.58
1.64%
-3.81%
0.86
-4.41%
12.21%
6.63%
1.18%
0.50
2.38%
2009
5.01%
8.98%
-3.97%
1.09
-3.63%
12.61%
7.46%
1.52%
0.47
3.21%
2010
6.01%
8.41%
-2.40%
1.10
-2.18%
10.59%
6.88%
1.53%
0.58
2.63%
2011
11.33%
10.11%
1.22%
1.06
1.15%
8.96%
7.07%
3.04%
1.08
2.82%
2012
12.94%
11.85%
1.08%
1.04
1.04%
10.81%
7.38%
4.48%
1.43
3.13%
2013
6.94%
10.90%
-3.96%
1.23
-3.21%
14.11%
7.29%
3.61%
1.19
3.04%
2014
8.61%
12.22%
-3.61%
1.80
-2.01%
14.23%
8.52%
3.70%
0.87
4.27%
13
ROCERNOA
FLEV
Financial
Spread
NBC
ROOA
RNOAROOA
OLEV
Operating
Spread
2005 5.46%
5.78%
-0.32%
3.17
-0.10%
5.88%
5.62%
0.16%
0.12
1.37%
2006 5.62%
10.87%
-5.25%
2.80
-1.87%
12.75%
10.19%
0.68%
0.11
5.94%
2007 -9.36%
7.78%
-17.14%
2.87
-5.96%
13.74%
7.30%
0.48%
0.16
3.05%
2008 -7.12%
8.88%
-16.00%
2.91
-5.50%
14.38%
8.01%
0.87%
0.23
3.76%
2009 -8.82%
9.54%
-18.37%
3.22
-5.70%
15.24%
8.22%
1.32%
0.33
3.97%
2010 2.93%
10.00%
-7.07%
3.71
-1.91%
11.91%
8.35%
1.65%
0.40
4.10%
2011 8.44%
12.88%
-4.44%
3.78
-1.18%
14.05%
10.18%
2.70%
0.46
5.93%
5.92%
3.53
1.67%
16.18%
13.74%
4.11%
0.43
9.49%
0.95%
1.16
0.82%
15.72%
13.93%
2.61%
0.27
9.68%
2014 9.81%
-2.46%
0.67
-3.69%
15.96%
11.08%
1.19%
0.17
6.83%
12.27%
14
4.3
ROOA
100
RNOA-ROOA
100
OLEV
100
OSPREAD
100
0
.083483
.068300
.0561122
.007950
0
.066796
.064100
.0352011
.013325
0
.016690
.006800
.0250576
-.005775
0
.479248
.386700
.4008711
.020010
0
.024796
.022900
.0350615
-.029175
10
.029070
.030830
-.000600
.055110
-.005030
20
.047580
.047000
.000400
.137600
.004500
30
.056230
.051900
.001300
.184860
.009460
40
.061460
.057060
.003060
.240240
.014560
50
.068300
.064100
.006800
.386700
.022900
60
.083980
.072020
.008960
.492100
.030460
70
.098860
.079890
.016260
.594740
.038720
80
.128520
.092360
.035840
.843260
.049860
90
.164710
.115840
.050450
1.150840
.073340
95
.193760
.123825
.085610
1.341390
.081325
Valid
Missing
Mean
Median
Std. Deviation
Percentiles
Table 10-2: Pearson Correlations between RNOA and components of the operating leverage
RNOA
ROOA
RNOA-ROOA
OLEV
OSPREAD
Table 10-1and Table 10-2 give the analysis of the effects of operating leverage. ROOA has a mean of
6.7% and median of 6.4% compared with a mean 8.3% and median of 6.8% for operating levered
profitability (RNOA). Accordingly, the operating leverage effect is 1.6% on average, 0.68% at the
median, and is positive for more than 95 percent of the observations.
The two components of the operating leverage effect, OLEV and the operating spread are both positive
at mean and median. The mean of the product of the two components (i.e., the operating leverage effect,
RNOA-ROOA) is positive. Because the Pearson correlation between OLEV and OSPREAD in Table
10-4 is positive (0.345).
15
RNOA
100
ROCE-RNOA
100
FLEV
100
FSPREAD
100
NBC
100
0
.047889
.051600
.1017557
-.135155
0
.083483
.068300
.0561122
.007950
0
-.035592
-.024300
.0674903
-.179195
0
1.276979
.872950
1.1478118
.077220
0
.034557
-.029600
.5004393
-.141450
0
.048925
.115100
.5055957
-.000395
10
-.070730
.029070
-.113300
.158450
-.100100
.046180
20
.015020
.047580
-.051920
.352860
-.074660
.078360
25
.020375
.052050
-.044275
.427025
-.062975
.085650
30
.023970
.056230
-.039420
.485500
-.054250
.089320
40
.035960
.061460
-.032020
.705840
-.036220
.106260
50
.051600
.068300
-.024300
.872950
-.029600
.115100
60
.066280
.083980
-.015520
1.080100
-.021480
.126160
70
.084680
.098860
-.010260
1.407480
-.012580
.143350
80
.110760
.128520
-.003120
2.260860
-.002800
.159840
90
.171820
.164710
.015440
3.335110
.029120
.201850
95
.216700
.193760
.039015
3.827145
.050405
.239620
Valid
Missing
Mean
Median
Std. Deviation
5
Percentiles
Table 10-4: Pearson Correlations between ROCE and components of the financial leverage
NBC
.000
.147
-.123
.127
-.994**
1
For financial leverage in Table 10-3, profitability (ROCE) has a mean of 4.8% and a median of 5.2%.
The difference between the mean and the median reflects the negative skewness of ROCE, which is
caused primarily by observations with negative earnings. RNOA, has a mean of 8.3% and a median of
6.8%. The mean ROCE is less than RNOA, so the mean financial leverage effect (ROCE-RNOA) is
negative (3.5%). The median financial leverage effect is also negative (2.4%), and the financial leverage
effect is negative for about 80% of the observations.
The two components of the financial leverage effect, mean FLEV and the financial spread are both
positive. And median FLEV is positive but median financial spread is negative. Yet the mean of the
product of the two components (i.e., the financial leverage effect, ROCE-RNOA) is negative. Because
the Pearson correlation between FLEV and FSPREAD in Table 10-4 is negative (-0.139). This negative
correlation is partially due to the positive correlation between FLEV and the net borrowing rate (NBR)
of 0.127: the higher the financial leverage, the higher the risk and therefore the interest rate that lenders
charge.
16
At the mean, OLEV is substantially smaller than FLEV, and OSPREAD is closer to FSPREAD. Yet
both the mean and the median effects of operating leverage on profitability are larger than the
corresponding mean and median of the financial leverage effect. In summary, even though operating
leverage is on average smaller than financial leverage, the mean and median of the leverage effect on
profitability is higher for operating leverage. Operating leverage is typically used to enhance
profitability more than financial leverage.
4.4
To identify the relationship between financial and operating leverage and the level of profitability by
regressing ROCE on financial leverage (FLEV) and operating leverage (OLEV). Following regression
tables presents summary statistics of 100 regressions from 2005 through 2014.
Variables Entered/Removeda
Model
Variables Entered
Variables
Method
Removed
1
OLEV, FLEV
. Enter
Model Summary
Model
R Square
.426a
Adjusted R
Square
Estimate
.181
.164
.0930189
ANOVAa
Model
Sum of Squares
df
Mean Square
Regression
.186
.093
Residual
.839
97
.009
1.025
99
Total
Sig.
10.735
.000b
Coefficientsa
Model
Unstandardized Coefficients
Standardized
Sig.
Coefficients
B
(Constant)
1
Std. Error
.008
.021
FLEV
-.007
.009
OLEV
.101
.025
Beta
.392
.696
-.075
-.772
.442
.397
4.109
.000
17
4.4.1
The abovementioned results indicate that the F-statistic value (corresponding to 10.735) is in the
rejection zone with a confidence level of 5%. This means that the null hypothesis is refused according
to the adopted decision support; subsequently, theres a statistically significant impact for the
independent variables (FLEV and OLEV) on the dependent variable (ROCE). In other words, the
alternative hypothesis is accepted.
4.4.2
Evaluating Hypothesis
18
CHAPTER 6: REFRENCES
Penman, Stephen, H, Financial Statement Analysis and Security Valuation, 3rd edition, McGrawHill, New York
Website: www.investopedia.com/
19
CHAPTER 7: APPENDICES
20