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3.

Hypothesis

: There is no statistically significant impact of financial leverage on profitability (Return on


Common Equity), for the companies of the textile industry.
: There is no statistically significant impact of operating leverage on profitability (Return on
Common Equity), for the companies of the textile industry.

3.7

Empirical Analysis

Correlation Matrix of Variables


Financial leverage and operating leverage variables will be examined with profitability together.
This examination will reveal statistical association by Pearson correlation method. This matrix will
be used to show all possible simple correlation coefficients among the variables. It will show how
strongly each independent variable is correlated with the dependent variable.
Regression Analysis of Operating and Financial Leverage on Profitability
=

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.

CHAPTER 4: ANALYSIS AND FINDINGS


4.1

Sample Companies
1.

Apex Spinning & Knitting Mills Ltd.

2.

CMC-Kamal Textile Mills Ltd.

3.

Prime Textile Spinning Mills Ltd.

4.

Safko Spinning Mills Ltd.

5.

Sonargaon Textiles Ltd.

6.

Tallu Spinning Mills Ltd.

7.

Alltex Industries Ltd.

8.

HR Textile Mills Limited

9.

Mithun Knitting and Dyeing Ltd.

10.

Stylecraft Limited

Spinning

Knitting & Dyeing

Ready-made Garments

4.2

Company Level Analysis

4.2.1

Alltex Industries Ltd


Alltex Industries Ltd
ROCE

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%

Interpretation of Operating Leverage


From above it can be noticed that operating leverage has been continuously fluctuating over years.
Impact of OLEV is favorable when operating spread is positive. During 2009 & 2010 operating spread
were negative and the impact of operating leverage were unfavorable.
Interpretation of Financial Leverage
From above it can be noticed that financial leverage has been increasing over years except the year
2009. But impact of financial leverage was unfavorable because financial spread was negative. It
happened because net borrowing cost was high over the years. But only exception was in year 2014
when impact of financial leverage levered up profitability because net borrowing cost reduced to only
1.95%.
4.2.2

Apex Spinning & Knitting Mills Ltd.


Apex Spinning & Knitting Mills Ltd.

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%

Interpretation of Operating Leverage


From above it can be noticed that operating leverage has been increasing over years. Impact of OLEV
is favorable when operating spread is positive. But operating spread were decreasing over the years.
Thats why impact of operating leverage were little.
Interpretation of Financial Leverage
From above it can be noticed that financial leverage has been fluctuating over years. But impact of
financial leverage was unfavorable because financial spread was negative. It happened because net
borrowing cost was high over the years. But only exception was in year 2014 when impact of financial
leverage levered up profitability because net borrowing cost was negative.

4.2.3

CMC-Kamal Textile Mills Ltd.

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%

CMC-Kamal Textile Mills Ltd.


Financial
FLEV
NBC
ROOA
Spread
1.69
-2.65%
8.58% 5.81%
1.49
-5.39%
10.14% 4.70%
1.31
-6.61%
9.43% 3.01%
1.41
-12.72%
8.86% -2.45%
0.99
5.05%
0.26% 5.03%
0.32
-0.59%
9.25% 7.80%
0.14
15.93%
-12.25% 3.74%
0.01
395.68%
-390.95% 4.70%
0.00
295.97%
-289.15% 6.74%
0.06
-7.79%
15.36% 7.44%

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%

Interpretation of Operating Leverage


From above it can be noticed that operating leverage has been fluctuating over years. Impact of OLEV
is favorable when operating spread is positive. Most of the year operating spread were positive except
2007, 2008 & 2011. But the company took small amount of operating leverage compared to other
companies thats why impact of operating leverage on profitability is low.
Interpretation of Financial Leverage
From above it can be noticed that financial leverage has been decreasing over years because net
borrowing cost was high except the year 2011, 2012 & 2013. In these three years interest income was
much higher than interest expense. As their net borrowing cost is higher than RNOA (return on net
operating asset), company like to keep their financial leverage to minimum.

4.2.4

HR Textile Mills Limited


HR Textile Mills Limited

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%

Interpretation of Operating Leverage


From above it can be noticed that operating leverage and operating spread have been increasing over
years except the last two year. As operating spread were positive, impact of operating leverage were
favorable for the companys profitability.
Interpretation of Financial Leverage
From above it can be noticed that financial leverage has been decreasing over years because net
borrowing cost was higher than RNOA. As financial leverage is not favorable for the companys
profitability, their financial leverage has a decreasing trend.
4.2.5

Mithun Knitting and Dyeing Ltd.


Mithun Knitting and Dyeing Ltd.

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%

Interpretation of Operating Leverage


From above it can be noticed that operating leverage has been increasing over years except the last three
year when company have seen a decreasing trend of operating leverage. As operating spread were
positive, impact of operating leverage were favorable for the companys profitability.
Interpretation of Financial Leverage
From above it can be noticed that financial leverage has been decreasing over years because net
borrowing cost was higher than RNOA. As financial leverage is not favorable for the companys
profitability, their financial leverage has a decreasing trend and company keeps it to minimum in recent
years.

10

4.2.6

Prime Textile Spinning Mills Ltd.


Prime Textile Spinning Mills Ltd.

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%

Interpretation of Operating Leverage


From above it can be noticed that operating leverage has been fluctuating over years. Impact of OLEV
is favorable when operating spread is positive. Most of the year operating spread were positive except
2005, 2006, 2009 & 2010. But the company took small amount of operating leverage compared to other
companies thats why impact of operating leverage on profitability is low.
Interpretation of Financial Leverage
From above it can be noticed that financial leverage has been decreasing over years because net
borrowing cost was higher than RNOA. As financial leverage is not favorable for the companys
profitability and net borrowing cost is increasing in recent years, their financial leverage has a
decreasing trend to make the negative impact of financial leverage to minimum.

4.2.7

Safko Spinning Mills Ltd.


Safko Spinning Mills Ltd.

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

Interpretation of Operating Leverage


From above it can be noticed that operating leverage has been fluctuating over years. Impact of OLEV
is favorable when operating spread is positive. Most of the year operating spread were positive except
2008 & 2009. But the company took small amount of operating leverage compared to other companies
thats why impact of operating leverage on profitability is low.
Interpretation of Financial Leverage
From above it can be noticed that financial leverage has been decreasing in recent years because net
borrowing cost was higher than RNOA except the year 2011. In 2011, return on net operating asset was
higher than net borrowing cost. Thats why financial leverage levered up the profitability in 2011. As
financial leverage is not favorable for the companys profitability, their financial leverage has a
decreasing trend to make the negative impact of financial leverage to minimum.
4.2.8

Sonargaon Textiles Ltd.


Sonargaon Textiles Ltd.
Financial
FLEV
NBC
Spread

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%

Interpretation of Operating Leverage


From above it can be noticed that operating leverage has been fluctuating over years. Impact of OLEV
is favorable when operating spread is positive. Most of the year operating spread were positive except
2007, 2008, 2013 & 2014. But the company took small amount of operating leverage compared to other
companies thats why impact of operating leverage on profitability is low.
Interpretation of Financial Leverage
From above it can be noticed that financial leverage has been decreasing because net borrowing cost
was higher than RNOA except the year 2007. As financial leverage is not favorable for the companys
profitability, their financial leverage has a decreasing trend to make the negative impact of financial
leverage to minimum.

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%

Interpretation of Operating Leverage


From above it can be noticed that operating leverage and operating spread have been increasing over
years except the last year. As operating spread were positive, impact of operating leverage were
favorable for the companys profitability.
Interpretation of Financial Leverage
From above it can be noticed that financial leverage has been increasing despite financial spread is
negative. As net borrowing cost is much higher than return on net operating asset, financial leverage
levered down the profitability. In 2011 & 2012, RNOA was greater than NBC. Thats why in those
years financial leverage was favorable for the company.

13

4.2.10 Tallu Spinning Mills Ltd.


Tallu Spinning Mills Ltd.
Year ROCE RNOA

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%

2012 23.77% 17.85%

5.92%

3.53

1.67%

16.18%

13.74%

4.11%

0.43

9.49%

2013 17.48% 16.54%

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%

Interpretation of Operating Leverage


From above it can be noticed that operating leverage and operating spread have been increasing over
years except the last two years. As operating spread has been positive and increasing, impact of
operating leverage were favorable for the companys profitability.
Interpretation of Financial Leverage
From above it can be noticed that financial leverage has been increasing but in last two years it is
reduced significantly. As net borrowing cost is much higher than return on net operating asset, financial
leverage levered down the profitability. In 2012 & 2013, RNOA was greater than NBC. Thats why in
those years financial leverage was favorable for the company.

14

4.3

Industry Level Analysis


Table 10-1: Distributions of RNOA and its operating leverage components.
RNOA
100

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

RNOA ROOA RNOA-ROOA OLEV OSPREAD


1
.952**
.902**
.523**
.949**
.952**
1
.727**
.352**
.998**
**
**
**
.902
.727
1
.676
.723**
.523**
.352**
.676**
1
.345**
**
**
**
**
.949
.998
.723
.345
1

**. Correlation is significant at the 0.01 level (2-tailed).

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

Table 10-3: Distributions of ROCE and its financial leverage components.


ROCE
100

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

ROCE RNOA ROCE-RNOA FLEV FSPREAD


1 .784**
.856** -.197*
.088
ROCE
**
**
.784
1
.350
-.094
-.036
RNOA
.856** .350**
1 -.219*
.163
ROCE-RNOA
*
*
-.197
-.094
-.219
1
-.139
FLEV
.088
-.036
.163 -.139
1
FSPREAD
**
.000
.147
-.123
.127
-.994
NBC
**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).

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

Results of Hypothesis Test through Regression

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

a. Dependent Variable: ROCE


b. All requested variables entered.

Model Summary
Model

R Square

.426a

Adjusted R

Std. Error of the

Square

Estimate

.181

.164

.0930189

a. Predictors: (Constant), OLEV, FLEV

ANOVAa
Model

Sum of Squares

df

Mean Square

Regression

.186

.093

Residual

.839

97

.009

1.025

99

Total

Sig.

10.735

.000b

a. Dependent Variable: ROCE


b. Predictors: (Constant), OLEV, FLEV

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

a. Dependent Variable: ROCE

17

4.4.1

Global Test Result of Regression

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

: There is no statistically significant impact of financial leverage on profitability (Return on


Common Equity), for the companies of the textile industry.
Above results reveals the result of the examination of this hypothesis. The abovementioned results
indicate that the t-statistic value, corresponding to -0.772 is in the acceptable zone with a confidence
level of 5%. This means that the null hypothesis is supported. In other words, theres no statistically
significant relationship between this independent variable (Financial Leverage) and the dependent
variable (ROCE).
: There is no statistically significant impact of operating leverage on profitability (Return on
Common Equity), for the companies of the textile industry.
Above results reveals the result of the examination of this hypothesis. The abovementioned results
indicate that the t-statistic value, corresponding to 4.109 is in the rejection zone with a confidence level
of 5%. This means that the null hypothesis is rejected. In other words, there is statistically significant
relationship between this independent variable (Operating Leverage) and the dependent variable
(ROCE).

18

CHAPTER 5: SUMMARY & CONCLUSION


The main purpose of the assignment was to analyze the two textile firms profitability through the
analysis of financial statements. With the basis from the reformulation of the financial statements,
profitability analysis has been prepared. The analysis of the key figures, told us that H.R. Textile has
increased ROCE, RNOA and ATO better than Prime Textile through the period of the analysis, 20092013.

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