The Behaviour of Financial Ratios for Capital and Labour Intensive Enterprises During the Economic Cycle

Abstract

The objectives of the study are firstly, to analyse and investigate patterns to determine whether or not there are specific justification(s) for the behaviour exhibited by capital intensive (CI) and labour intensive (LI) enterprises for a particular ratio during either or both the upswing and decline phases of the economic cycle. The second objective is to isolate financial indicators which could possibly be used to forecast financial performance by identifying leads and lags.The findings of the research suggest that CI and LI enterprises differ in terms of the behaviour of certain financial indicators during either or both an upswing and decline of the economic cycle. It is therefore not possible to consider the universal use of financial indicators. It also appears that it is possible to use a large number of traditional indicators to forecast financial performance as they follow the trade cycle. Several indicators suggest the possibility of leading the economic cycle and therefore could provide an indication of an economic upswing or decline.