Patterns in financial performance indicators of capital and labour intensive enterprises during an upswing and a decline in the economic cycle

Abstract

The objective of this paper is to investigate patterns in the behaviour of various financial performance indicators for capital intensive (CI) and labour intensive (LI) enterprises during an upswing (1987–1989) and a decline (1990–1992) phase of the economic cycle, as measured by the Gross Domestic Product.The nature of an enterprise's activities and the fluctuations which occur in the economic cycle are used to distinguish between patterns in the indicators relevant to the measurement of financial performance. This paper considers the influence of the economic cycle on financial performance in CI and LI enterprises. An analysis is conducted of 62 financial performance indicators in order to ascertain possible different patterns between CI and LI enterprises over two predetermined periods which represent an upswing and a decline in the economic cycle. Exploratory Data Analysis (EDA) is used to identify possible differences between groups of CI and LI enterprises during these phases of the economic cycle. The identified patterns obtained from the results of the EDA are applied to categories of financial performance indicators in order to determine possible trends between CI and LI enterprises as exhibited by the financial performance indicators' behaviour during an upswing and a decline period in the economic cycle. The majority of the patterns obtained from the analysis are to be expected. However, some patterns exhibited by the financial indicators were unexpected. These patterns need clarification.An analysis of the results obtained by means of median plots and notched box and whisker plots indicates that nine financial performance indicators included in the research show statistically significant differences between CI and LI enterprises during either an upswing, a decline or during both periods. The analysis further indicates that five performance measures (three cash flow, one profitability and one inflation-adjusted indicator) highlight differences between CI and LI enterprises for both the upswing and decline in the economic cycle. In addition, four cash flow indicators suggest statistically significant differences between CI and LI enterprises during an upswing or decline period.The results of this investigation can be used to make financial forecasts for various types of enterprises over different expected phases of the economic cycle.