DETERMINANTS INFLUENCING THE PROFITABILITY OF MANUFACTURING COMPANIES IN CASE OF ET

Abstract

Profitability is defined as the earnings of a company that are generated from revenue after deducting all expenses incurred during a given periods. Also it is the primary measure of the overall success of company. The analysis of profitability ratios is important for the Shareholders, investors, manufacturers and government alike. Thus this thesis analyses the determinants of Ethiopia’s manufacturing profitability for the period of seven years: 2011-2017. This study was based on the secondary data of 32 sample large tax payers manufacturing companies collected from the audited financial statements of the companies from the large tax payers of ice and national bank of Ethiopia. Return on Asset (ROA) was used to representing profitability,whilst independent variable was represented by the leverage ,capital intensity, managerial ef iciency and macro-economic factors (GDP), inflation rate, and exchange rate). Dynamic Panel data regression method, using Generalized Method of Moments (GMM) estimation, was used for the data analysis. To overcome the problem of spurious regression, the panel unit root test of Levin– Lin–Chu tests was made for each variables and applied first dif erence transformation for the variables that had unit root. As the result of moment and model selection criteria implied, the endogenous variables were first order panel in the model with their smallest MBIC and MQIC values. The parameter estimated with two-step system generalized methods of moments(GMM) estimation method. The results suggest that one unit increase in lagged profitability, managerial ef iciency,capital intensity, GDP, Exchange rate and one ratio decrease in leverage (debt ratio), ceteris paribus, turn out were found to increase the profitability of manufacturing companies by around 0.69, 0.179, 4.52E -06 ,3.844, 0.04 and 0.393 ratio, respectively.The analyses implied the manufacturing companies should minimize leverage(debt) financing from its capitals and should emphasize the management of appropriate financing to increase profitability. Also policy makers should coming up with better policies on improvement of